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Mumbai: The National Stock Exchange (NSE) has issued a framework for application programming interface (API)-based trading that brings retail algorithmic (algo) strategies under a clearly regulated domain. 

Until now, retail algo trading has operated in a loosely supervised space. This follows the Securities and Exchange Board of India's (Sebi) February directive on retail algo trading. NSE’s 5 May circular tightens access, sets thresholds, and mandates algo tagging and registration.

Mint explains what algorithmic trading is, what the NSE circular mandates, and how the rules will impact retail traders and brokers.

Algorithmic trading, or algo trading, refers to the automated buying and selling of securities using pre-programmed strategies. These algorithms define when, what, and how much to trade, without manual input. Retail traders typically connect to brokers’ systems via APIs to execute these trades. Under the new framework, such access is strictly regulated. API usage is now limited to automated trading systems that comply with infrastructure and registration norms—such as static IP addresses, security protocols, and unique algo identifiers.

Clients can run their own algos, or those developed by brokers or third-party vendors, as long as they follow these new rules.

The NSE’s circular sets out standards for safer retail algo participation. Clients must use static IPs to access trading APIs. Any algorithm that sends 10 or more orders per second (OPS) to an exchange must be registered. Those below this limit are exempt but must still carry a generic algo ID. All algo orders—registered or not—must carry a unique identifier assigned by the exchange. Algo providers must register with exchanges and get IDs for each strategy, which can be shared across brokers.

Brokers are required to log all API sessions and ensure they are auto terminated before the next trading day.

Retail clients will now be required to update their setups to meet static IP norms, stricter KYC requirements, and algo tagging rules. Brokers will be required to enhance backend systems to log API use and monitor order per second limits.

Mayank Mundhra, vice-president, risk and head research at Abans Financial Services Ltd, noted a significant challenge is upgrading their existing backend systems to handle and monitor real-time order flow effectively. 

“This requires investments in infrastructure and technology to track orders per client and enforce throttling mechanisms," he said, adding that compliance without disrupting legitimate trading activities could be challenging.  

“Furthermore, brokers may need to educate and support clients on the new requirements, which could incur additional costs and resources."

He also warned of implementation risks, particularly if clients are using dynamic IP addresses or have frequent changes in their trading setups.

Client onboarding will now require algo registration, IP verification, and revised API agreements. Experts say this will be more rigorous but vital for risk mitigation.

Also Read: NSE’s investor base has almost tripled since it sped up share transfers in late March

Brokers must enforce the new safeguards. Ajay Garg, chief executive officer, SMC Global Securities, said all API sessions would have to be automatically logged out before the start of the next trading day to minimize the risk of unauthorized activity.

The broker has to operationalize the 10 order-per-second limit mandate in their internal server, and they can choose to reject or not process the order if the limit is exceeded based on their policy framework, Garg said. 

Brokers have full control over how to enforce the 10 order-per-second threshold on their server, providing ease and full control over the process, said Garg.

Also Read: Sebi may ease rules for high-frequency traders but keep close watch on retail F&O activity 

Most casual retail algo traders operate well below the 10 OPS limit. Prashant Shah, co-founder and chief executive of Definedge Securities brokerage, said it is primarily high-frequency traders (HFTs) who may be affected. 

Static IP requirement could be tough for some setups, “particularly around the static IP requirement, which could be more challenging," he added.

While the circular brings clarity, registration standard operating procedures and operational specifics are still awaited. Experts agree on the intent but note that implementation will demand effort. There’s also concern that order-per-second enforcement may require further upgrades and constant client communication.

Kkunal V Parar, vice-president, technical research, Choice Broking, said it may “require updating existing systems to reject orders exceeding the limit, potentially impacting clients who operate close to this threshold and necessitating clear communication and infrastructure adjustments by brokers."

“However, these measures could also increase barriers for innovation by introducing additional compliance steps, delays, and costs for algo providers, especially emerging or smaller firms seeking to develop and deploy new algorithms quickly," he added. 

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