SEBI’s New Algo-Trading Norms Could Put an End to Illegal PMS Practices
In its consultation paper released on December 13, 2024, the Securities and Exchange Board of India (SEBI) proposed tighter regulations for retail algo trading. These changes could be the final blow to the prevalent yet illegal practice of extended family members using algorithms developed by traders to manage portfolios.
Key Proposals by SEBI
The paper outlines measures to ensure greater transparency and accountability in algo trading. One major suggestion is that retail traders must register their algos with the exchange through their brokers. Additionally, these algos can only be shared within the immediate family, defined as self, spouse, dependent children, and dependent parents.
This move aims to curb informal portfolio management services (PMS) within extended families—where uncles, aunts, cousins, or even distant relatives use these trading tools. Such practices often bypass SEBI’s requirement for formal PMS registration, putting investor capital at significant risk.
Why the New Rules Are a Game-Changer
SEBI’s earlier directives already required traders to generate daily tokens for algo usage, linking the token to a specific machine ID and IP address. However, traders found ways to bypass these checks by using multiple brokers.
Now, SEBI proposes that brokers act as principals and algo providers as agents. This ensures that an algo can only operate within trading accounts associated with the broker, making it harder to disguise unregistered PMS activities. If multiple accounts attempt to trade using the same machine ID and IP address, brokers can flag this as suspicious.
Implications for Traders
The new norms are a double-edged sword for algo traders:
1. End of Informal PMS Arrangements:
Many traders who previously managed funds for extended family members under informal agreements, often involving profit-sharing, will now face strict restrictions.
2. Potential Risks for Families:
Traders warn that stricter rules could lead to riskier practices. For instance, relatives might transfer funds to a trader’s spouse or dependent to access a registered algo, effectively losing control of their money.
3. Challenges for New Algo Providers:
Emerging algo developers often rely on family members as initial clients to demonstrate their strategies’ success. The new guidelines could limit this option, slowing their growth.
Suggested Improvements
While many market participants have welcomed the proposed changes, some believe the definition of “family” should be expanded to include a spouse’s parents. One trader explained, “Often, a spouse’s parents are financially dependent on the trader’s family. Including them in the definition would reflect a more realistic scenario without diluting the rules.”
Potential Workarounds and Concerns
Despite the tighter regulations, some traders fear that new loopholes could emerge. For instance, a cousin might transfer funds to a dependent’s account to gain access to a successful algo, creating a risky arrangement with little investor protection.
A Step Towards Safer Markets
SEBI’s proposals aim to strike a balance between encouraging innovation in algo trading and protecting retail investors from unregulated PMS operations. By limiting algo usage to immediate family members and implementing stricter monitoring mechanisms, SEBI is sending a strong message about accountability and compliance.
For traders and algo developers, these new norms underscore the importance of adhering to ethical practices and operating within the regulatory framework. As the algo trading landscape evolves, so must the safeguards that protect investor interests.
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Keywords: SEBI algo trading norms, retail trading regulations, algo provider compliance, informal PMS, trading rules India, SEBI consultation paper December 2024.