Is algo trading legal in India?

by Alpha Bot An automated trading system

There can be a plethora of questions in a person’s mind when he/she is opting to optimize their investing game by employing algo trading strategies. One of the most common and sensible question that arises in a person’s mind is this: is algo trading legal? Would I be liable to legal ramifications if I indulge in algo trading? Would I end up losing my money?

To be honest, these fears are well founded, and any intelligent person who is entering a new domain should be worried about the safety of their assets. In this article below, we’ll try to settle these questions with appropriate answers and hopefully, make it easier for you to make a decision.

Algo trading refers to using computer-based algorithms to make much more informed and less risky buying and selling decisions. Of course, the algorithms have to be written by humans and they need to be approved by a CA before they can be implemented in the software. Now to answer the question about the legality of automated trading, we need to look at institutional investors and retail investors separately.

Legality for Institutional Investors

The answer to the question of whether or not algo trading is legal in India is ‘yes’. In fact, it has been legal in the country since the year 2008 when SEBI (Securities and Exchange Board of India) passed a regulation making automated trading legal in the country for institutional investors.

Ever since it was legalized, it has risen rapidly in the past decade – so much, in fact – that it contributes nearly 43% of all the trades that happen on the NSE (National Stock Exchange). SEBI has also passed a set of guidelines for employing algo trading strategies in the security market. SEBI has also allowed for collocation facilities among institutional investors, which means that upon payment of a rent, the traders are allowed to place their servers within the exchange premises. This prevents latency, which can lead to huge losses.

Legality for Retail Investors

Currently, there are no particular set of instructions or guidelines that have been passed by SEBI for retail investors so there is no answer to the above question: whether or not algo trading legal in India? According to SEBI, allowing the retail investors to get involved in algo trading would be like giving a nuclear weapon to someone who hasn’t even fired a gun in all his life. However, if there is some retail investor who aspires to be involved in algo trading, he needs to get himself certified as an Authorized Personnel; he also needs to acquire a dealer terminal from the broker that he’s in contact with. Also, the guy who is chosen to man the terminal also needs to have a NISM Series VIII certification.

Even now, SEBI is in the process of making the game fairer and give everyone a chance at making huge profits – whether it’s an institutional investor or a retail investor. The problem, however, is that the retail investors’ scene is so decentralized that things could go helter-skelter if everyone is allowed to enter the algo trading at once. The reason why SEBI is moving so cautiously is because big money is at stake, given the large volume of trades that happen through algo trading. But hopefully, in time, SEBI will be able to devise a policy that would give retail investors a fair chance at making the most of algo trading strategies.