Sebi comes out with guidelines for stock brokers providing algorithmic trading services - what should investors know

Capital markets regulator Sebi on Friday came out with guidelines for stock brokers, who provide services relating to algorithmic trading to investors, to prevent instances of mis-selling.

The guidelines came after the Securities and Exchange Board of India (Sebi) observed that certain stock brokers provide algorithmic trading facilities to investors through unregulated platforms.

The unregulated platforms are offering algorithmic trading services or strategies to investors for automated execution of trades. Such services and strategies are being marketed with "claims" of high returns on investment, Sebi said in a circular.

Further, "ratings" have been assigned to the strategies, which could lead to investors being lured by such claims. This may amount to mis-selling of such services and strategies to investors, it added.

Accordingly, Sebi has given certain responsibilities to stock brokers that provide algorithmic trading facilities to investors through such platforms.

Such stock brokers have been restricted from making any reference to the past or expected future return of the algorithm as well as associating with any platform that provides any reference to the past or expected future return of the algorithm, Sebi said.

"Stockbrokers 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, within seven days," it added.

The framework, applicable with immediate effect, is aimed at preventing such acts and instances of mis-selling.

Earlier in June, the markets regulator had cautioned investors against dealing with such unregulated platforms offering algorithmic trading services and strategies.

Algorithmic trading or 'Algo' in market parlance refers to orders generated at a super-fast speed by the use of advanced mathematical models that involve automated execution of the trade, and it is mostly used by large institutional investors.