SEBI issues guidelines for brokers providing algorithmic trading services

SEBI issues guidelines for brokers providing algorithmic trading services

The Security Exchange Board of India (SEBI) has issued guidelines for unregulated platforms that are offering algorithmic trading services/ strategies to investors for automated execution of trades. In a letter addressed to the regulated Stock Exchanges, SEBI has stated that it has come to its notice of such services and strategies that are being marketed with "claims" of high returns on investment and "ratings" have been assigned to the strategies, which could lead to investors being lured by such claims, resulting in mis-selling of such services and strategies to investors.

It is further stated that stock brokers provide algorithmic trading facility to investors through such platforms. In a press release dated June 10, 2022, SEBI had previously cautioned investors against dealing with such unregulated platforms.

Therefore, in order to prevent such acts, SEBI has directed the following:

1. Stock Brokers who provide services relating to algorithmic trading shall not:

1.1. directly or indirectly make any reference to the past or expected future return/performance of the algorithm; and/or

1.2. directly or indirectly associate with any platform providing any reference to the past or expected future return/performance of the algorithm.

2. Stock brokers who are directly/indirectly referring to any past or expected future return/performance of an algorithm or are associated with any platform providing such reference, shall remove the same from their website and/or disassociate themselves from the platforms providing such references, as the case may be, with in seven days from the date of this circular.

3. Stock exchanges, are hereby, directed to:

3.1. take necessary steps and put in place necessary systems and procedures for implementation of the above provisions;

3.2. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above provisions;

3.3. bring the provisions of this circular to the notice of stock brokers and disseminate the same on their website;

3.4. monitor compliance of this circular by taking confirmation from stock brokers that they are compliant with clause 4.1 and 4.2 of this circular;

3.5. along with the proof of the same; and shall submit a compliance report to SEBI in this regard within 60 days from the date of this Circular.

In the event of any non-compliance with the aforementioned directives, SEBI shall take appropriate action under the securities laws.