API developers rankled by Sebi algo papers, plan to approach regulator

Classifying all API orders as algo could stifle innovation: Industry players

Markets regulator Securities and Exchange Board of India’s (Sebi’s) proposal of treating all orders emanating from application programming interface (API) as algorithmic (algo) orders has rattled tech firms that deal in trading software and applications.

Many are planning to approach the regulator as they believe this approach could stifle innovation and set the markets back.

Nithin Kamath, chief executive officer of Zerodha, India’s largest broking firm, believes the proposal, if implemented, may force brokers to stop offering APIs altogether.

“India is emerging as a tech capital of the world. This would mean taking two-steps backward in a technology-first world. Disallowing APIs will also not solve the problem of unregulated algo trading platforms. They will just shift from using broker APIs to third-party automation tools that aren’t in the control of the brokers,” he said.

“Stating that all orders processed via APIs will be treated as algo trades makes no sense. APIs have tremendous utility and value outside the purview of algo trading. In fact, algo makes up a very small portion of the market. One must not confuse API trading for algorithms,” added Harsh Agarwal, co-founder of RAIN Technologies, a firm that develops automated trading solutions.

An API is a software that allows two applications to communicate with each other. In recent years, third-party firms have developed APIs that can be linked to a trading application like that of Zerodha or HDFC Securities. Once installed, APIs get the authorisation to perform a host of functions in the trading account — such as placing buy and sell orders or cancelling orders.

Ujjwal Jain, CEO and founder of WealthDesk, said the intent of the regulator is good but some things and interpretation in the paper has put the industry on the back foot. “Sebi should clearly demarcate instead of painting everything with the same brush by saying any order through API is an algo order,” he said.

For instance, firms such as smallcase and WealthBaskets have tie-ups with over a dozen brokerages and offer several trading strategies or curated portfolios. These platforms are said to have over 5 million users and have helped channel over Rs 20,000 crore into the markets.

“The desire to generate alpha has prompted many brokers and third-party platforms to offer APIs to their retail clients, which are being utilised by investors to automate their trades. Thus, the consultation paper by Sebi comes at a critical juncture and is welcome considering the transparency measures proposed to be introduced,” said Gaurav Mistry, associate partner, DSK Legal.

In the discussion paper on ‘algo trading by retail investors’, Sebi said, “all orders emanating from an API should be treated as an algo order and be subject to control by stock broker. The APIs to carry out algo trading should be tagged with the unique algo ID provided by the stock exchange granting approval for the algo.”

The rationale behind Sebi’s proposal to classify all APIs as algo is the inability of brokers to differentiate between an algo and a non-algo order coming from an API.

According to NSE data, about 14 per cent of cash market volumes are routed through algo. However, industry players peg the algo share at 40-45 per cent as there are several unauthorised algos at play. They say the reason Sebi has taken up the issue is to crack down on unregulated algo trading platforms, which have mushroomed amid the boom in the market.

Moin Ladha, partner, Khaitan & Co, said Sebi’s proposals are aimed at protecting investor interest. “If the approval process is efficiently implemented, I don’t see this causing any dent in the volume. The current proposal would make the brokers responsible and provide retail investors a redressal mechanism.”