SEBI's consultation paper on algo trading via APIs

sujith
SEBI has released a consultation paper on algo trading for retail traders. You can read it here.
  • SRIJAN
    SRIJAN edited December 2021
    Please explain point 6.2 and 6.4 @sujith sir!
  • rakeshr
    You can go through the Update (9th Dec 2021) section at the start of this article to understand consultation paper implications on API users.
    We are also studying the paper. SEBI is seeking public comments, so if you have any, please e-mail them directly at [email protected]
  • eseses
    If this is all that SEBI could think of in so many years, it is quite below average; because a lot of it is ambiguous and some even out of place in context of retail investors.

    The questions that come to my mind:
    • All API trades to be treated algo trades and then saying that all algos have to run to broker's server - so basically are they saying that no more API access?
    • All algos to be certified (as it is done today) - That is not correct - the algos that run directly and place orders directly with exchanges may have issues with margin monitoring etc. therefore need that certification/ approval. An algo running through API is already subjected to all of broker's checks (which are already regulated by SEBI).
    • They say unauthorized altering/ tweaking is not permitted - what is unauthorized? - all algos have variables which need changes/ updates - how will they decide what is unauthorized? - They are saying if its an algo, a human cannot intervene, which is absurd too!
    • After all their certifications and controls they say : "Stock broker is responsible for all algos emanating from its APIs and redressal of any investor disputes". What are they getting to?
    • It seems they are trying to regulate algo providers but in the process making it difficult for end users to have their own algo - and thereby helping the algo providers by making them the only viable option, that can continuously comply with these requirements.
    Would love to hear more views!

    Even if a feedback needs to be given to SEBI - we should look at consolidating thoughts and then send something backed by a few thousand individuals.
  • SRIJAN
    Thank you @rakeshr sir.
  • sodha_rakesh
    sodha_rakesh edited December 2021
    Humble Request to the community members of Kite Connect Forum to reply to [email protected]
    with Subject: "Algorithmic Trading by Retail Investors" as given in the paper and request SEBI to continue allowing API trading without registering an Algo

    Thanks @sujith for creating this thread.

    More details on Zerodha article link
  • swas99
    swas99 edited December 2021
    []
    I agree with @sodha_rakesh.

    If we as a community of independent algo traders won't push back on this then the incompetent authorities of the country will pass yet another incompetent law.

    I, as a software engineer, will try to include few alternative suggestions in my email to '[email protected]' on how they can handle the short-comings without entirely blocking algo-trading for retail investors.

    But each one of us need to send an email to '[email protected]' suggesting they are against the proposal.
    All we can do is try to send as many emails as possible by 22nd Jan(take 50,000 emails as a ballpark number). Only time will tell what they do.

    I will try to share some more email templates over the weekend, but you can refer to some samples shared in this link:
    https://justpaste.it/2y1iu

    Please modify the text in the samples & try to use your own words.
  • rjamitsharma
    I think as Nithin sir said sebi just want small players out of the game only big players can have their own algos by means of their brokerage firm or with alliance with brokerage firm


    But sebi has to allow api access for everyone because it is the need of the future.


    Now it's our duty as @swas99 said we need to raise our voice and send emails as much as possible
  • mlearner
    Humble request to everyone in the community to please send their feedback and suggestions at [email protected] asap with email subject: "Algorithmic Trading by Retail Investors."

    I found the below 2 points in the paper to be most concerning. If you are an algo trader, you can understand the repercussions of these points very well, challenge these points and send your feedback to SEBI.

    1) Each Algo strategy, whether used by broker or client, has to be approved by Exchange and as is the current practice, each algo strategy has to be certified by Certified Information Systems Auditor (CISA)/ Diploma in Information System Audit (DISA) auditors.


    2) Brokers shall also deploy suitable technological tools to ensure that appropriate checks are in place to prevent unauthorized altering/tweaking of algos.

  • algodev
    Here is my reply, Didn't send it , just for you guys to make some more suggestions.
    Dear Sebi,

    Thank you for publishing the Consultation Paper on Algorithmic Trading by Retail Investors.I don't think adding a process of algo approval is scalable and will work in the long run. This is not an efficient solution to solve the 'Pump & Dump' problem.
    Instead of penalizing the start-up developers you can enforce precautionary rules.
    Here are some suggestions;
    warning messages and workflow on the broker side for the applicant of the API access and trading.
    Take consent from the trader with SMS Verification.
    Display statutory warning messages on the website or Mobile Apps
    It is literally impossible and unethical to impose stringent rules on small developers and retail traders who want to benefit from the new age Internet Technology to benefit the wealthy FII and High Frequency traders.

    Thanks,
  • ComT
    Is Kite Publishers API comes under these guideline ?
    @sujith @rakeshr
  • vijoeyz
    Well, I just read the proposal, and it is quite backward. The proposal does not differentiate between an individual developer/algo-trader managing her own risks vs. a third party (an entity) providing algorithm-based services. The entire purpose of this proposal, which is admirable, is to manage the systematic financial risks emanating from algorithm-driven trades. However, the working group's proposal is a brute force in that they are not categorizing individuals and entities and treating them equally.

    I find the following from the proposal of concern to individual algorithm developers:
    • "All orders emanating from an API should be treated as an algo order..." (6.1)
    Theoretically, this is a simple definition and ok as long as individuals and entities are differentiated.
    • "Each Algo strategy, whether used by broker or client, has to be approved by Exchange" (6.2)
    This is truly a backstep and a rule-bound to be changed again because it is non-scalable. Programs require fixing every day, which ultimately may result in control flow changes and thereby the strategies. Exchange cannot expect reproval to happen again for, say, an already approved strategy due to modifications/maintenance!

    Like the proposal, itself states that "... broker can identify the
    orders emanating from an API, they are unable to differentiate between an algo and non-algo order emanating from an API" (4.5). How does the SEBI then propose to monitor changes to happening to an approved strategy? One can simply not determine changes to algorithm strategy by tracing order history. Therefore, this approval system is going to be a manual process, incapable of tracing changes to approved strategy, and therefore, bound be erroneous.
    • "The potential loss in case of failed algo strategy is huge for retail investor" (4.9)
    Agreed. However, if the investor is an individual developer and then she is well aware of the risks involved here. Rules that apply to third parties should not apply to individual developers that do not have commercial interest. Exchanges and brokers will nevertheless have control measures, as under the Extant Provisions (3), to detect anamolies. Suspicious trade patterns will anyhow attract scrutiny irrespective of algo or not as per.


    "All algos developed by any entity has to run on the servers of broker wherein the broker has control of client orders, order confirmations, margin information, etc"
    (6.4)

    Now with this proposal, brokers will have a monopoly! How does hosting the algo on broker servers help in order management?! They already have RMS for that. This will only increase cost and maintenance for individual developers.


    All in all, the proposal is not high in quality for the reasons stated below. To me, it looks more of a dictation of minutes of meetings than a formal specification document!
    • Algorithms can be intellectual property, and disclosing those to SEBI can be a questionable practice. Can exchanges not locate order concentration, spurious trade activities?
    • SEBI did not disclose the constitution of the SEBI Working Group and how well qualified the members are?
    • So, "The working group held meetings with various market
    • participants and based on deliberations...", why did then Nitin Kamath of Zerodha go on to say that, "... all brokers will have to stop offering APIs if these proposals are implemented ..." (source). This does not feel a democratic decision.
  • vijoeyz
    @rakeshr @sujith
    "Brokers shall also deploy suitable technological tools to ensure that appropriate checks are in place to prevent unauthorized altering/tweaking of algos." (6.3)
    Can Zerodha comment on their ability? Is it really possible to track changes to algorithms?
  • mlearner
    Has anyone also thought about profitable algo codes getting leaked because of multiple stakeholders involved in this entire process of review and approval at exchange & broker level?
  • algodev
    @sujith I hope Zerodha will keep ticker API even order API banned by SEBI.
  • Gjain75
    Its like asking a pharma company, which spent billions of dollars and years in research to successfully develop a drug formula, to disclose its formula (which can be leaked easily, thanks to corruption).
  • rjamitsharma
    rjamitsharma edited December 2021
    @Gjain75 hahaha
  • XS8910
    algo traders like me cant manage the emotion & ego while manual execution thats why we choose algo...SEBI want all traders like me want to trade manual and lose all money..
  • AnastasiaSin
    @Gjain75 Hahaha you are absolutely right, it sounds very funny))
  • Gjain75
    Gjain75 edited March 14
    @rakeshr I recently enquired in detail a few other platforms that provide algrothmic trading. I also went through NSE's master circular which contains guidelines on "Algorithmic Trading" in para 47 of the said circular, to understand the concern of the regulator more in detail. There seems to be a logic behind these regulations.

    As per the guidelines, "any ORDER THAT IS GENERATED USING AUTOMATED EXECUTION LOGIC shall be known as algorithmic trading". The purpose of "automated generation of order" is irrelevant.

    The basic logic seems to prevent flooding of erroneous / bogus or otherwise "not apparently genuine or intented" orders.

    My discussion with some established algo platforms inform that for algos, they need to get each and every algo approved by exchange, which is tested thoroughly by exchange for various RMS parameters and then approved. Even a change in algo, needs to be pre-approved and each order going out is stamped as "algo order".

    Therefore, standing completely against the proposal, may not be successful, given that using APIs, millions of users can fire orders and going by logic behind surveillance, un-controlled or un-intended result of algo can lead to flooding of order book and erroneous trades, which may be against the users themselves (which is also one of the objectives of regulators).

    Hence, following may get accepted, and in sync with the perceived objectives and logic:

    1. An order should be accepted only when the required margin (maybe little more than span margin to cover next day calcs also) is ALREADY present in account (to be ensured by the trading member (broker) as against the current mechanism of demanding margin by the clearing member from TM during pre settlement but post market closure.

    2. Auto square off of position if during the day or next, the margin is insufficient to cover the stipulated margin (hence, the client would need to fund extra money in account always)

    3. Algos through APIs to be permitted only for clients of brokers, not for their prop book, who normally already use more specialised softwares and have access to algo trades.

    4. Per client exposure limit may be fixed (this can be delegated to the trading member to fix for their respective clients), which can keep rising based on conduct of account.

    5.Per order size to be limited to avoid flooding, if any, of large orders.

    6. Number of orders per second to be limited.

    7. High frequency trading anyways is automatically discouraged because of STT, brokerage and charges. Exclusion of prop book would ensure that HFT continues to be discouraged bcoz of brokerage, among others.

    8. If trades are executed for purely risk management (to be ensured by the trading member for each client), then the exposure limits be set relative to the underlying portfolio / holdings.

    9. Given above, the requirement to "disclose code or algo logic" may be dispensed with, given it is Intellectual Property.

    Hope that regulators take "enablers" approach than discouraging it completely.
  • healthsecure15
    This is just another reason for retail/mid-size investors and traders to become passive. As usual regulators are way behind the times. This will end up creating wilder swings and more inflow to MF's and ETF's.

    How they expect wealth-invest-trade tech to develop in India is beyond understanding, no wait I know the answer of how they will develop.
  • iamsatishkumarn
    iamsatishkumarn edited September 6
    There is new circular by SEBI on Algo trading, How does it impacts us, Do some one have some idea what is the future, Will there be API'S allowed to used by retail investors.
  • vijaynair
    As far as I understand there is no active enforceable law currently against users using API like Kite on a personal level. But this could change (unlikely)
  • pradeep007
    What is the current status on this matter?
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