In a collaborative effort to enhance the security and accountability of algorithmic trading (algo trading), leading online broking firms engaged with stock exchanges on March 4 to propose guidelines for providing access to brokers’ Application Programming Interface (API) to retail players. The proposed system includes a licensing and registration process for vendors offering algorithmic strategies, ensuring a standardized and secure environment for retail traders utilizing algos.
Ensuring Accountability Through Registration: Brokers have suggested the implementation of a licensing and registration system for vendors providing algorithmic strategies to retail traders, similar to the system for intermediaries advising retail investors on stock market investments. This system would require vendors and individual traders proficient in understanding algo setups and segments to undergo specific exams and obtain licenses. The move aims to bring accountability and expertise to algo trading, enhancing overall market integrity.
Unique Algo ID and Attribution: Under the proposed guidelines, brokers will only collaborate with registered algo vendors, providing unique algo IDs to facilitate the tracking of orders and attributing them to specific algos. This measure is expected to bring transparency and traceability to algorithmic trading activities on broker platforms.
OAuth Mechanism for Enhanced Security: To bolster security, brokers have proposed adopting the ‘OAuth’ mechanism, widely used in web and mobile applications for single sign-on and social login features. The OAuth system would authenticate the algo vendor, ensuring that retail investors using the algo platform do not have to share their credentials. This approach addresses the prevalent issue of data sharing outside the broker’s control when algo vendors use clients’ credentials and logins.
Industry Standards Forum (ISF) to Present Recommendations: The Industry Standards Forum (ISF), comprising brokers’ associations, will present the proposed guidelines to the market regulator Securities and Exchange Board of India (SEBI). The recommendations aim to establish standardized practices for API access and algorithmic trading, fostering a secure and transparent ecosystem for retail traders.
SEBI’s Efforts to Regulate Algo Trading: Last month, SEBI proposed measures to regulate algo trading by retail investors, emphasizing broker responsibility for algo platforms’ approval, cybersecurity, and data security. The proposed regulations seek to ensure transparency, accountability, and adherence to industry standards in the growing field of algorithmic trading.
