View on SEBI’s consultation paper on Algorithmic Trading by Retail Investors

Our view on SEBI’s consultation paper on Algorithmic Trading by Retail Investors

I am sure most of you already know of this - SEBI has put out a consultation paper on Algorithmic Trading by Retail Investors yesterday.

I was part of one Twitter Spaces y’day night and was bit surprised at the conclusions drawn that SEBI wants Algo Trading to be banned, honestly I feel this is not what the expected outcome of this consultation paper is and it is easier to conclude on the extreme negative side of it, that algos will be banned and as a result API based trading will be banned. I clarified a lot on the Twitter Spaces how broker systems work, in particular the RMS (Risk Management Systems) and OMS (Order Management Systems) and things that happen at our end while we send orders to exchange, I will park that topic for a discussion some other day (as it is way too large and off-topic).

For now I will share my personal views on this consultation paper:

  • SEBI has asked for your comments & suggestions on the consultation paper, if you have any suggestions, I would encourage you to share them with SEBI. I have personally been a part of these working groups at SEBI and they do review & consider each one of them. In fact, if there is merit and they need more information, they may even connect with you for discussion / further understanding.
  • Algo Trading is the future, and so is API based transactions. If you think or your stock broker is saying that SEBI will ban it - this is wrong or misleading. Regulators in India are more aligned towards innovations & technology than possibly anywhere else in the world.
  • SEBI wants Stock Exchanges to know which orders are coming from where and how; as a regulator it is a very fair ask. If you are worried because you are doing something wrong, then you shouldn’t be doing that in the first place.
  • Orders like Cover & Bracket that traders place today at Dhan, are marked as algo orders when they are sent to exchanges. So exchanges already know.

What SEBI aims for:

  • Stopping misuse of API based products (or algos) for retail investors who will get lured in by promises of higher returns (I will explain this below in link to this tweet).
  • Exchanges should know where orders are coming from, right now they know it comes via brokers (institutional or retail) and any platforms that use co-location facilities offered by exchanges.
  • Avoid unknown algo-providers to operate in the market for retail investors.
  • Today when Research Analysts / Registered Advisors put out stock recommendations for buy / sell or offer advisory services, they are regulated in one way or the other; but when the same is done via Algos or APIs, SEBI or Exchanges don’t have any control over it, so it is a fair ask.

In my opinion, what SEBI is trying to avoid is retail investors getting lured to markets by unregulated products riding on top of Stock Broking APIs. The simplest version of this I had tweeted about earlier is- https://twitter.com/BeingPractical/status/1444304796840697857.

What you should know:

  • Dhan’s Investment Platforms (our App & Website) have gone through the same Exchange certification process that’s been referred through in the consultation paper here.
  • If you are using any of the reputed stock brokers, chances are they too have done this and undergone this same process.
  • We recently launched (just this week) our latest product - Trade Directly from TradingView charts, this too went through the exact same certification process, for NSE (Equity, Futures & Options, Currencies), BSE (Equity) and MCX (Commodities)

How we at Dhan look at this:

  • SEBI has asked for comments & suggestions, we will share ours on this with them.
  • In principle we are in alignment with the broad possible proposed framework shared by SEBI, it is very much doable.
  • We will suggest excluding retail investors executing retail algos with a daily cap (say executing less than 100 orders per day). This will ensure users like you are not are impacted by this. (And 100 is a lot of orders, the max a good retail traders will usually do is approx 50 per day)
  • We will help algo platforms get required certifications in place for them to run business as usual on top of Dhan APIs (we are building these), and possibly share some numbers with exchanges on users, orders, etc month on month (which I assume may not be required as exchanges intend to mark them separately).
  • We will streamline the onboarding process for all algo-providers building on top of Dhan APIs.
  • We will monitor usage of our APIs, more importantly how they are advertised to retail investors and ensure they follow the general advertising code of conduct that are prescribed by the exchanges from time to time.
  • We do not indulge in any prop-trading and have no intention of this either. So we would rather prefer not having proprietary algo trading strategies (broker owned or run), but instead will choose to partner with algo providers and platforms instead.
  • Retail investor choosing to give authorisation to Algo Trading platforms, we will take explicit consent (already mentioned in the proposed framework) and ensure all orders are authorised with a 2FA.

At Dhan we are extremely positive about this outlook, and feel this will keep the bad apples away from the ecosystem. We will work with algo-provider platforms to support them and help them get required certifications and assessment done.

This is the first version of our view, we are internally discussing this with our teams and some stakeholders including algo providers, if there is something you would like to share with us - happy to hear your view, we are on api@dhan.co

Thank you
-pj

PS: Someone on Twitter Spaces mentioned yesterday that now with this SEBI / Exchanges will know all our algos and strategies, and they will copy. Trust us, SEBI / Exchanges have much larger responsibilities to do and even us as Stock Broking Platforms have enough things to do already :slight_smile:

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Wonderfully explained , thnx
Waht I loved the most

We do not indulge in any prop-trading and have no intention of this either

A long way to go DHAN ! Happy to be a early member of this beautiful journey

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I also participated in yesterday’s twitter space group discussion (as a listener)
All the points raised by PJ in yesterday’s discussion and the above article are exactly the same, which is perfectly presented.

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