Performance validation would be crucial as the capital market regulator proposes opening algorithmic trading to retail investors.

Algorithmic trading involves using computer programs that follow a defined set of instructions to place a trade. Its advantages include faster order execution, reduced transaction costs, greater transparency, better audit trails and improved liquidity.

However, algo trading has been limited to institutional investors so far.

The Securities and Exchange Board of India (Sebi), which has been regulating the domain since 2012, has come up with a consultation paper on the participation of retail investors in algo trading.

BSE MD and CEO Sundaraman Ramamurthy on Monday said that exchanges are already facilitating algo trades and would have some additional responsibilities once the circular is finalised.

“Even today many retail investors are running algos. Sebi wants to bring it to books so that it can be regulated. Exchanges may have some additional responsibility. If anybody tomorrow says if in my algo I make money, there is a performance validation agency which is getting formed,” Ramamurthy said at a Merchants Chamber of Commerce organised event on Monday.

Sebi in its consulting paper has said that the evolving nature of algo trading, particularly with increasing demand from retail investors, has necessitated a further review and refinement of the regulatory framework so that retail investors are also able to participate in such trading with proper checks and balances.

The consulting paper has laid out the responsibilities of the stockbrokers, the algo providers and the stock exchanges while categorising algos as a white box (logic is disclosed) and a black box (logic is not disclosed).

Among the responsibilities of stock exchanges are putting in place a standard operating procedure for testing algos, developing a kill switch for orders emanating from a particular algo ID, defining roles and responsibilities of brokers and empanelled vendors and defining the criteria and process of empanelment of vendors.

The consulting paper has also proposed that algos that have been developed by tech-savvy retail investors themselves using programming knowledge also need to be registered on the exchanges through the brokers.