The Securities and Exchange Board of India (SEBI) has implemented stricter regulations on derivatives trading to protect retail investors from high-risk financial activities. These measures include increasing the minimum contract size and limiting weekly options contracts. As a result, online brokerage firms expect a significant drop in revenues due to reduced trading volumes.
In response, brokers are shifting their focus to algorithmic (algo) trading as an alternative revenue stream. Algo trading uses computer programs to execute trades quickly and efficiently. Retail investors can access algo trading by developing their own strategies on DIY platforms or using strategies provided by brokers and fintech firms.
SEBI has also introduced guidelines to regulate retail participation in algo trading. Brokers must get approval from stock exchanges for each algorithm they offer to clients. Additionally, all algo orders require unique identifiers to ensure transparency and oversight.
By adopting algo trading, brokers can diversify their services and offset revenue losses caused by SEBI’s tighter rules on derivatives. This shift allows them to stay competitive in the evolving financial landscape while maintaining compliance with regulatory standards.
