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The National Stock Exchange (NSE) has introduced new rules to ensure retail investors are safely involved in algorithmic trading, following a directive from the Securities and Exchange Board of India (SEBI). These changes come as more retail investors show interest in this growing area, and the aim is to strengthen oversight and control over trading systems used by brokers, third-party providers, and client-developed algorithms.
One of the key features of these new rules is tighter control over the API (Application Programming Interface) access that brokers provide to retail investors for connecting to their trading systems. To get access to this, clients must now provide a static IP address. This IP will be linked to the API keys they use to connect to the broker’s platform. Importantly, a single static IP can only be linked to one client at a time, although family members can share it. Clients will also be allowed to update their static IP addresses once a week.
Clients who have multiple API keys, such as for different market segments or to run different algorithms, must follow new guidelines. Brokers must ensure that only one predefined API key is used for non-registered algorithms. The other API keys must be reserved exclusively for registered algorithms. Additionally, brokers are required to ensure that all API sessions are logged out at the end of each day. API access can only be used for automated trading systems, computer algorithms, or software solutions that help in executing transactions in the stock market. Brokers also need to include necessary risk management checks in these systems.
Another important update is the introduction of a Threshold Order Per Second (TOPS) rule. This rule limits clients to a maximum of 10 orders per second per exchange or market segment. If clients place fewer orders than this limit, they do not need to register their trading system with the broker. These orders will simply be marked as ‘algo’ and assigned a generic algorithm ID by the exchange.
However, if a client exceeds the TOPS limit, they must register their algorithmic trading system with the exchange before they can continue placing orders. Exchanges will make the registration process simple for clients whose orders stay below a certain threshold. To register, clients need to provide details to their brokers, who will send this information to the exchange. Once registered, the exchange will issue a registration ID that will be given back to the client through the broker. If a retail investor develops their own algorithm, it will also need to be registered if it exceeds the TOPS threshold.
Brokers who offer their own algorithms must also register these algorithms with the exchange and get a unique ID for each one. All algorithm providers must be registered with the exchanges where their algorithms will be used. While brokers may have commercial agreements with algorithm providers, they are still responsible for ensuring these providers comply with securities laws and do not engage in any illegal activities.
The new rules also place the responsibility for resolving client complaints about algorithmic trading with the brokers. Brokers must monitor the TOPS limits for unregistered algorithms. Following a 2022 ban on brokers teaming up with unauthorized algorithm platforms, the NSE can now block algorithms that disrupt the market. Additionally, brokers may charge extra fees for API services provided to retail investors.
These new guidelines are an important step toward improving safety and transparency in retail algorithmic trading. The updated rules aim to enhance oversight, introduce better security measures, and bring the benefits of professional-grade trading systems—like faster execution and better liquidity—to retail investors, while managing the risks that come with it.
