Zerodha’s Nithin Kamath Explains SEBI’s New Algo Trading Rules: API Limits & Strategy Restrictions

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The Securities and Exchange Board of India (SEBI) has introduced new regulations for retail traders using broker APIs for algorithmic trading. Zerodha’s co-founder, Nithin Kamath, recently shared insights on these new rules via X (formerly Twitter). The regulations impose restrictions on API order frequency, strategy monetization, and marketplace operations to ensure transparency and prevent misleading trading practices. Exchanges must release operational guidelines by April 1, 2025. This move aims to protect retail investors and regulate algo trading platforms effectively.

Introduction to Zerodha and Its Business Model

Zerodha, India’s leading discount brokerage firm, revolutionized stock trading with its zero-brokerage model. Founded in 2010 by Nithin Kamath and Nikhil Kamath, it disrupted traditional brokerage services by offering cost-effective trading solutions. Zerodha generates revenue through brokerage charges on intraday and F&O trades, a subscription model for platforms like Coin (mutual fund investments), and technology services such as Kite, Console, and Streak for trading and analytics. It also invests in fintech startups through its venture arm, Rainmatter. Unlike many startups, Zerodha remains bootstrapped, allowing it to focus on a customer-centric approach without external investor pressure.

SEBI’s New Algo Trading Rules

SEBI’s new framework for algorithmic trading aims to ensure fair practices by imposing key regulations. Retail traders using broker APIs must adhere to exchange-prescribed order frequency limits, while those selling algorithmic strategies are required to register with exchanges. Marketplaces that share paid trading strategies must obtain an RA license and exchange registration. Zerodha’s Co-Founder Nithin Kamath highlighted these rules, stressing transparency and compliance—automation remains allowed but within limits, and selling algo strategies now requires broker partnerships and regulatory approval. Exchanges must announce operational details by April 1, 2025. Retail traders must monitor order frequency to avoid penalties, comply with SEBI’s registration norms if monetizing strategies, and expect stricter scrutiny on algo trading marketplaces to enhance investor protection.

Background of Algo Trading in India

Algorithmic trading, or algo trading, automates trade execution based on pre-set conditions and, while initially used by institutional traders, has become increasingly popular among retail investors, necessitating regulation. In India, retail participation in algo trading has surged due to API-based automation tools, contributing to increased market volatility through high-frequency trades. However, unregulated algo trading can lead to market manipulation, and misleading trading strategies sold to inexperienced traders pose significant financial risks. Regulatory measures are essential to ensure fair market practices and protect retail investors from potential exploitation.

Learning for Startups and Entrepreneurs

1. Importance of Regulatory Compliance

Startups in fintech must align with regulations to maintain credibility and avoid penalties.

2. Tech-Driven Financial Solutions

Businesses should focus on transparency and investor protection when offering financial services.

3. Innovation with Responsibility

While automation improves efficiency, companies must ensure ethical AI and algorithmic trading practices.

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