SEBI Launches Settlement Scheme for Brokers in Algo Trading Violations

Over 110 Brokers, Including Zerodha, 5Paisa, and Motilal Oswal, Receive Show-Cause Notices

Mumbai, India – The Securities and Exchange Board of India (SEBI) is preparing to introduce a settlement scheme for stock brokers who were served show-cause notices over their association with unregulated algorithmic trading platforms.

The move comes as SEBI looks to resolve the issue swiftly, preventing it from escalating into a prolonged legal dispute similar to the NSEL scam or illiquid options case, sources familiar with the matter revealed.

SEBI’s Proposed Settlement Plan

• The settlement scheme will be presented before SEBI’s board on March 24 as an information memorandum and is expected to be notified soon after.
• Low Settlement Costs: SEBI considers the violations to be an industry-wide issue rather than a major infraction, keeping the settlement amount between ₹1-2 lakh per broker.
• Application Process: Brokers must apply to SEBI to avail of the scheme.
• Limited-Time Offer: The window will remain open for three months, with a possible extension depending on response levels.

Background: SEBI’s Crackdown on Unregulated Algo Trading Platforms

In 2023, SEBI issued show-cause notices to over 110 brokers, including:

• Zerodha
• 5Paisa Capital
• Motilal Oswal Financial Services

This action followed SEBI’s observation that several unregulated platforms were offering algo-based trading strategies with misleading claims of assured returns. These platforms, such as Tradetron, facilitated automated trading by linking algorithms to brokers’ systems, violating SEBI’s directives.

SEBI’s Prior Warnings and Circulars

SEBI has taken multiple steps to curb unregulated algo trading:

1. June 2022: SEBI issued a public statement warning brokers against associating with unregulated algo trading platforms.
2. September 2022: SEBI released a circular titled “Performance/Return Claimed by Unregulated Platforms Offering Algorithmic Trading Strategies”, which:
   • Barred brokers from referencing past or expected returns of such strategies.
   • Prohibited collaborations with platforms that make assured return claims.
   • Mandated brokers to sever ties within seven days of detection.

Despite these warnings, SEBI found that many brokers continued their affiliations with these platforms, leading to investigations and regulatory action.

New Regulatory Measures for Algorithmic Trading

In response to the growing retail interest in algo trading, SEBI introduced new rules on February 4, 2024, to bring greater accountability to brokers:

• Brokers will now act as principals for algo trading executed via APIs.
• Algo providers and fintech vendors must be empanelled with stock exchanges to operate legally.
• Brokers are prohibited from onboarding non-empanelled algo providers.

Future Steps by SEBI

Alongside the settlement scheme, SEBI is also working on a standardized enforcement mechanism to handle algo trading violations more transparently.

With SEBI’s firm regulatory stance, the market is expected to see greater compliance among brokers, reducing risks for retail traders involved in algorithmic trading strategies.