Algorithmic Trading by Retail Investors

SEBI has recently come up with a proposal to regulate API based trading by Retail Traders. More details about it can be found in this link.


As SEBI is seeking feedback from public. We have written to them about it. Given below is our response to them.

Mail Content


I am very glad to hear that SEBI is putting in checks on Retail Algo Trading. Here’s my feedback based on my personal experience in this field.


  • Risks to the markets
    • As these orders go through broker’s server. The majority of the risk will be taken care by brokers automated RMS (Risk Management System) checks. Also, all points mentioned in your (Section 3. Extant Provisions) shall also help
    • retail algo client can be defined as someone with capital less than a threshold (Example: capital less than 1 cr)
      • If the brokers enforce this rule, then retail client will not have enough capital to cause very large fluctuations in the market (at least for most liquid stocks & derivatives as any kind of fluctuation into those would need very large capital)
      • For illiquid stocks or derivatives, simple ban retail algos. 
      • So, this way you will control the risk of market manipulation on both liquid & non-liquid stocks/derivatives
    • API access is critical in today’s world for retail clients to have any chance of competing with bigger institutions. So, the process to get approvals or to use APIs should not be so stringent that it would result in retail clients simply opting out of using APIs and their own algos.
  • APIs use cases (Section 6.1)
    • APIs can be used for making customized trading platform for “manual trading” & NOT necessarily automated/algo trading. 
    • So, all orders emanating from APIs should not be treated as algo orders & should not require unique algo id (Section 6.1).
  • Running algos on brokers server (Section 6.4)
    • Assuming I have understood this correctly, making all algos run on broker’s server is unnecessary
    • It will put unnecessary system development and computer infrastructure load on brokers. Smaller brokers may not have technically skilled staff to implement this in a full proof manner
    • Whether the algo runs on broker’s server or outside broker’s server; the orders will still always go through the broker’s server. So, in case of any malfunction in the algo, it can be detected by the broker based on the order patterns, order checks etc. & broker’s system can always disable the algo automatically.
  • Algorithms
    • It takes a lot of research to come up with an algorithm that works successfully on a consistent basis
    • A good performing algorithm is a valuable asset & an intellectual property of the algorithm creator
    • It may not be right for him to disclose this to anyone including the exchange (due to the chances of theft)
    • Hence, there needs to be a clarify on what details of the algo he needs to disclose in order to get the approvals
  • Vendors selling algos & promising returns
    • Honestly, someone who has a good performing algorithm can make so much money that he would never have to sell that algo to retail clients to make money
    • The more people use the same algo, the more it loses its performance (Example, in a market with 100 traders, everyone cannot make money if they use the same strategy)
    • The more secret a good strategy remains, the better it will perform
    • Considering above 3 points, it is obvious that those who are selling algo or any kind of strategies to retail customers are making money by selling strategies which would not make consistent profits
    • In most cases, retail clients end up losing their money
    • So, the regulations should not allow for selling algos (instead there should be platforms that allow a user to research, backtest & create his own algos)

My knowledge & understanding of the regulations may not be sufficient & completely right. So, please consider my sincere apologies in case any of my comments do not seem valid.


Pritesh Mhatre

I have around 15 years of experience developing Financial Software. I took a break from my career to start my own algorithmic trading setup. This new journey started well and along with my own proprietary trading systems, I also started building automation systems for retail traders, fund managers and HNIs. I was employed with firms like Morgan Stanley, HSBC & SunGard. I work on various technologies, but my strengths are building server side cloud based algorithmic trading systems built primarily using Java programming language. Apart from all of this, I am a big fan of Formula 1 racing :-)

2 thoughts on “Algorithmic Trading by Retail Investors”
  • Rahul Raut says:

    Very nice summary hope SEBi will agree to these points. May be you can send email to us and we can forward the same to SEBI email

    December 13, 2021 at 12:35 pm
    • Pritesh says:

      Just copy the content…

      December 17, 2021 at 1:14 pm

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