Executive Summary:
SEBI's circular addresses unregulated platforms offering algorithmic trading strategies with misleading high return claims. It restricts stock brokers from associating with such platforms or referencing algorithm performance. Stock brokers must remove related references within seven days, and stock exchanges must implement the circular's provisions, monitor compliance, and submit a report to SEBI within 60 days.
Key Points / Main Content:
Algorithmic Trading Restrictions:
* Stock brokers cannot directly or indirectly reference past or expected future algorithm performance.
* Stock brokers cannot directly or indirectly associate with platforms providing such performance references.
Compliance Requirements for Stock Brokers:
* Stock brokers must remove any references to algorithm performance from their websites.
* Stock brokers must disassociate from platforms providing such references.
* These actions must be completed within seven days of the circular's date.
Directives for Stock Exchanges:
* Implement necessary systems and procedures for the circular's provisions.
* Amend relevant byelaws, rules, and regulations.
* Inform stock brokers about the circular and disseminate it on their website.
* Monitor compliance from stock brokers, including proof of compliance.
* Submit a compliance report to SEBI within 60 days of the circular.
General:
* The circular is effective immediately.
* Non-compliance may result in action by SEBI under securities laws.
Impact Analysis:
Stock Brokers:
Impact: Restrictions on promoting algorithmic trading services based on performance claims and associations with platforms making such claims.
Action Required: Remove performance references, disassociate from related platforms within seven days, and provide compliance confirmation to stock exchanges.
Stock Exchanges:
Impact: Mandated to implement and monitor compliance with the circular's provisions.
Action Required: Establish systems for implementation, amend regulations, inform stock brokers, monitor compliance, and submit a report to SEBI within 60 days.
Investors:
Impact: Aims to protect investors from potential misselling and misleading claims related to algorithmic trading strategies.
Action Required: Be cautious of unregulated platforms offering algorithmic trading services with high return claims.
Securities and Exchange Board of India (SEBI):
Impact: Enhanced regulatory oversight over algorithmic trading services and increased responsibility to protect investors.
Action Required: Enforce the circular's provisions and take action against non-compliance.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): The regulatory body for the securities market in India.
Stock Exchanges: Recognized entities that facilitate trading in securities.
Stock Brokers: Intermediaries who execute trades on behalf of investors.
algorithmic trading: Automated trading strategies or services often offered via unregulated platforms.
Securities and Exchange Board of India Act, 1992: The law under which SEBI derives its powers.
Aradhana Verma: Deputy General Manager at SEBI, issuing the circular.
algorithmic strategies: Trading strategies that are automated using computer programs.
Press Release No. 2020-22 dated June 10, 2022: A prior communication from SEBI cautioning investors.
CIRCULAR
SEBI/HO/MIRSD/DOP/P/CIR/2022/117 September 02, 2022
To,
All Recognized Stock Exchanges
Stock Brokers through Recognized Stock Exchanges
Dear Sir/Madam,
Subject: Performance/return claimed by unregulated platforms offering
algorithmic strategies for trading
1. It has come to the notice of the Securities and Exchange Board of India (SEBI) that
some unregulated platforms are offering algorithmic trading services/strategies to
investors for automated execution of trades. Such services and strategies are being
marketed with “claims” of high returns on investment. Further, “ratings” have been
assigned to the strategies, which could lead to investors being lured by such claims.
This may amount to mis-selling of such services and strategies to investors.
2. In this regard, SEBI had cautioned investors against dealing with such unregulated
platforms offering algorithmic trading services/strategies vide Press Release No.
20/2022 dated June 10, 2022.
3. It has also come to notice of SEBI that stock brokers provide algorithmic trading
facility to investors through such platforms.
4. In order to prevent such acts and instances of mis-selling and to protect the interest
of investors in the securities market, it has been decided that:
4.1. Stock Brokers who provide services relating to algorithmic trading shall not:
4.1.1. directly or indirectly make any reference to the past or expected future
return/performance of the algorithm; and/or
4.1.2. directly or indirectly associate with any platform providing any reference
to the past or expected future return/performance of the algorithm.4.2. Stock brokers who are directly/indirectly referring to any past or expected
future return/performance of an algorithm or are associated with any platform
providing such reference, shall remove the same from their website and/or
disassociate themselves from the platforms providing such references, as the
case may be, within seven days from the date of this circular.
5. Stock exchanges, are hereby, directed to:
5.1. take necessary steps and put in place necessary systems and procedures
for implementation of the above provisions;
5.2. make necessary amendments to the relevant bye-laws, rules and
regulations for the implementation of the above provisions;
5.3. bring the provisions of this circular to the notice of stock brokers and
disseminate the same on their website;
5.4. monitor compliance of this circular by taking confirmation from stock brokers
that they are compliant with clause 4.1 and 4.2 of this circular along with the
proof of the same; and shall submit a compliance report to SEBI in this
regard within 60 days from the date of this Circular.
6. The provisions of this circular shall be applicable with immediate effect.
7. Appropriate action may be taken by SEBI under the securities laws for non-
compliance of the above provisions.
8. This circular is issued in exercise of powers conferred under Section 11(1) of the
Securities and Exchange Board of India Act, 1992, to protect the interests of
investors in securities and to promote the development of, and to regulate the
securities markets.
Yours faithfully,
Aradhana Verma
Deputy General Manager
Tel. No: 022 26449633
aradhanad@sebi.gov.in