SEBI's 2025 Framework For Safer Retail Participation In Algorithmic Trading: An Evaluation Of Investor Protections, Regulatory Gaps, And International Comparisons
- IJLLR Journal
- 4 days ago
- 2 min read
Abhirami M Soman, LLM, Christ (Deemed to be University), Bangalore
ABSTRACT
The fast-growing interest in algorithmic trading in India, which now accounts for over 60% of market activity, has significantly increased retail participation, especially among young and inexperienced investors. This increased involvement also puts these people at risk of the enhanced risks of opaque black-box algorithms, application programming interface (API), cybersecurity threats, and behavioural biases. The circular issued on 4 February, 2025 by SEBI with the title of “Safer Participation of Retail Investors in Algorithmic Trading” establishes several main safeguards. These are to formalise principal-agent relationships between brokers and algorithmic service providers and classifying algorithms as white-box or black-box. In particular, black-box algorithms must be registered by a research analyst and provide internal reports.
The paper is a critical analysis of how the above framework affects retail investors, and it is observed that the framework can place significant accountability on brokers, most of whom are not highly technical in post- trading, yet provide few ex-ante protections. Critical gaps are created, such as the lack of suitability or appropriateness of assessment of retail clients, insufficient investor-facing transparency about algorithmic behaviour during stress conditions, an almost wholly intermediary-based approach instead of regulating algorithm designers directly.
The SEBI regime is inferior to the international standards, including the MiFID II of the EU, the regulations of the U.S. SEC/FINRA, and the IOSCO principles in a number of aspects. Even though the circular is a progressive move against retail access, it continues to create informational asymmetries and further imbalances the economic risks on retail investors who are digitally naive. To successfully overcome these weaknesses, the Securities and Exchange Board of India (SEBI) must put in place a strong ex ante protection system, a more investor-oriented disclosure system, and harmonize its regulatory regime with global best practices, thus creating a balanced balance in the dynamic algorithmic trading system of India.
Keywords: Algo trading, SEBI regulation, Stock brokers, investor protection, MiFID II comparison.
