Sebi offers settlement for brokers facing action in algo trading

By | June 10, 2025
SEBI headquarters – SEBI settlement scheme for brokers

In a major regulatory development, the Securities and Exchange Board of India (SEBI) has announced a settlement scheme for brokers involved in cases related to unauthorized algo trading. The scheme targets brokers associated with third-party platforms that offered assured returns, a violation of SEBI’s regulations.

Why SEBI Introduced the Scheme

SEBI’s decision comes in response to the rise of unregulated algorithmic trading platforms. These platforms promised fixed profits through automated trading, attracting thousands of retail investors. Although algo trading itself is legal, many platforms misused it by advertising guaranteed returns, which is strictly prohibited.

Importantly, brokers were found to be enabling such services, either knowingly or due to poor oversight. SEBI had warned against this behavior in 2022. However, several cases continued to surface, prompting the need for a more structured and fair resolution method.

Key Highlights of the Settlement Window

The scheme offers brokers a chance to settle regulatory proceedings without admitting guilt. It is open from June 16 to September 16, 2025. During this period, eligible brokers can apply and pay a fixed settlement amount, which is expected to be around ₹1 lakh. While the final amount is yet to be confirmed, this figure provides a reference point.

This settlement applies only to brokers facing action for associating with algo platforms that violated SEBI norms. It includes cases pending before SEBI, its adjudicating officer, the Securities Appellate Tribunal (SAT), or Indian courts.

Benefits of the Scheme

The initiative aims to:

  • Speed up resolution of pending cases
  • Reduce litigation costs for both SEBI and brokers
  • Clear regulatory backlogs efficiently
  • Encourage compliance among market intermediaries

Additionally, this step promotes market stability. Brokers who opt for settlement can resume normal operations without the shadow of legal battles. At the same time, SEBI ensures that violations are addressed through financial penalties.

Algo Trading and Its Growing Risks

Algo trading uses pre-programmed strategies to execute trades automatically. It brings speed, precision, and emotion-free decisions. While this is beneficial, the lack of oversight in some platforms has created significant risks.

Some third-party platforms operated without SEBI approval. Many even made bold claims of monthly profits. As a result, retail investors were misled, and many lost money when the algorithms failed.

SEBI had issued clear warnings in the past. It reminded brokers of their responsibilities to verify the legitimacy of platforms integrated with their services. However, enforcement remained difficult due to the sheer number of players and rapid tech adoption.

Industry Reactions

The broking community has largely welcomed SEBI’s move. Many smaller firms, especially those without advanced compliance systems, see this as a practical way to close old cases.

Experts note that this scheme reflects SEBI’s balanced approach. It distinguishes between willful misconduct and systemic errors. Brokers who acted in good faith but lacked clarity can now settle and move forward.

One compliance officer at a leading brokerage said, “This shows SEBI is serious about investor protection, but also willing to listen. The scheme gives us a chance to make corrections without getting stuck in court cases.”

What Happens Next?

Starting June 16, SEBI will release detailed FAQs and the final framework. Brokers will need to submit their settlement applications within the three-month window. They must also ensure no further association with unregulated algo tools.

Moving forward, SEBI will tighten its grip on algo trading. Here are the steps being planned:

  • Mandatory approval of algos by stock exchanges
  • Audit trails for every algo transaction
  • No advertising of guaranteed returns
  • Full disclosure of strategy logic and risks to clients

Moreover, SEBI and exchanges are building a real-time monitoring system. This will allow them to track the use and performance of approved algorithms. Such systems aim to bring greater transparency and reduce misuse.

Conclusion: A Fair Move That Balances Growth and Control

SEBI’s settlement scheme offers a much-needed reset in India’s growing algorithmic trading space. It ensures that brokers are held accountable, but also gives them a way to fix errors and comply with future rules.

For investors, this signals stronger protection. For the industry, it provides clarity and a path forward. As Indian markets continue to embrace technology, regulators and participants must work together to ensure that innovation never comes at the cost of integrity.

This scheme is not just about closing old cases. It’s about setting the foundation for a cleaner, more transparent trading ecosystem in India’s future.