LexTalk Magazine - January 2022

In 2008, the Securities Exchange Board of India’s (‘SEBI’) introduced the concept of algorithmic trading in Indian
markets. In simple words, algorithmic trading is automated execution logic inspired trading based on pre-
determined computer strategies fed into the system depending on various market patterns, parameters, or price
strategies (“algo-trading”). Access was initially restricted only to institutional investors, however, stock
exchanges started leasing co-location servers to brokers and other fintech firms which resulted in a higher retail
investor involvement. This resulted in few broader guidelines for algo-trading being put in place in 2012.

Who provides algo-trading services?

Various brokers and fintech platforms like Zerodha, 5Paisa along etc along with several specific algo-trading
ventures are involved in this business. It is used by mutual funds, banks and other large financial institutions to
enable large volumes of trade as this system removes the need of manual checking and human intervention for
execution and also allows a high ability to scale such transactions by automation.

What are SEBI’s concerns?

In the recent years with the huge impetus to fintech companies and their takeover of the market space, third party
Application programming Interface (“API”) based algo-trading. In trading, APIs assist in the connection between
algorithms and a broker platform to execute transactions. Today, SEBIs extant regulations to govern algo-trading
through measures which include monitoring of the broker terminals and approval of all algorithms by the
exchange along with having appropriate risk control mechanisms.

However, the third-party applications being used by investors through APIs are unregulated. The broker can
identify the trades executed through APIs but they are unable to differentiate between an algo order or a non-
algo order.

Such algos currently do not need any regulatory approvals. SEBI has said that “This kind of
unregulated/unapproved algos pose a risk to the market and can be mis-used for systematic market manipulation
as well as to lure the retail investors by guaranteeing them higher returns”. There is also no investor grievance
redressal framework for such third party API based algo-trading.

What does SEBI recommend?

Some key proposals, amongst others, made by SEBI through its consultation paper issued on 9th December
2021 (“Paper”) are as below:

Treatment of APIs as algo orders which are under the control of the respective stock broker. The APIs carrying
out the algo trades should be classified by a unique ID provided by the respective stock exchange providing
approval for the said algo.
The approval of all algos to be obtained by the stock broker from the stock exchange. Every algo trading
strategy has to be approved by the stock exchange and must be certified by a Certified Information Systems
Auditor (‘CISA’) or by an individual holding a Diploma in Information System Audit (‘DISA’), which is in line
with the existing practices.
Stock exchanges and brokers must develop a system which ensures the deployment and usage of only
approved APIs and algos. Brokers must ensure that such system prevents the unauthorized alteration and
tweaking of approved APIs and algos.

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Algos developed by an entity must run What is the best way forward?
on the servers of the stock broker
wherein the broker exercises control. In my view, SEBI has itself in its Paper suggested a good
Stock brokers, on the other hand, must way to achieve some sort of middle ground of regulation
ensure that the algos are deployed and versus ease of business. SEBI has raised a question as to
function in a controlled manner. In turn, whether algo developers and providers can come under
stock brokers will have to provide the definition of ‘investment advisor’ or ‘research analyst’ to
grievance redressal mechanisms and be be covered by the relevant regulations thereunder.
responsible for all investor disputes. However, investment adviser framework is very heavily
The obligations of the stock broker, the regulated and mostly involves client specific advice, while
third-party algo/API vendor and the research analysts provide a set of research facts to a
trader (end-user client) have to be broader public sector. In this line, it would make reasonable
expressly defined, with the stock broker sense to presently include such third party algo providers
being responsible for assessing the to obtain requisite registration under the SEBI (Research
suitability of the trader before offering Analyst) Regulations, 2014. SEBI can have an effective view
the algo facility. Furthermore, the stock of the providers and minor amendments can be made to
broker shall ensure that only those third- ensure SEBI’s needs to have sight on the algo traders.
party vendors with whom the broker While SEBI’s Paper is well-intended and retail investor-
entered into an agreement with, shall driven, it must also factor in the growth of a nascent
use the name of the broker in industry (i.e. fin-tech) that requires a favorable regulatory
testimonials within advertisements. framework to function and strive to strike a balance
Stock brokers will perform specific between both agendas. The Paper is still open for
reports on algorithm checks as a part of comments and comments made in this line can be quite
the annual audit process and submit the effective to achieve a good middle ground between
report to the relevant stock exchanges. investor protection and ease of business.

A step back in the tech-forward future Written By
of Indian Markets?
Nishant Prasad
The key concerns which the market and
especially the brokers have is the Manager-Legal,
classification of all API based trading as Scripbox
algo-trading and a requirement of
mandatory approval for ‘all’ algorithms even
by third party providers. The exchange
approval process being tedious and long
will result in brokers effectively not
providing APIs to third party algo
developers and providers. This will
effectively lead Indian markets a couple of
steps backwards rather than progressing
forward to a tech first economy.
There may also be some issues relating to
intellectual property whereby all algo-
providers will have to reveal their trade
secrets to the exchanges through the broker
and chances of leakage, re-use etc will be
prominent.

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4 Tips to Leap Written By
Ahead In a
Litigation Khong Zhi Jian
Career
Partner,
Tan & Khong
Chambers

I had wished that other senior practitioners had told me some practical aspects of legal practice bluntly
and directly (and maybe even curtly), when I was still new and fresh from the oven. But for some reason,
they didn’t always do so, and I had to learnt many of these things the hard way over the years.

My views below may differ from other practitioners, and is painted solely from my personal perspective
of litigation practice in Peninsula Malaysia, especially in a small firm setting. Nonetheless, I believe
having some mindfulness of these things would help propel any fresh or wannabee lawyer ahead of their
peers:

1.Learn the Common Practices & Customs of the Firm

There is a saying, “When in Rome, do what the Romans do”. Nothing could be further from the truth
when one joins a new firm.

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Most firms have a certain ‘standard’, from the way 3.Unspoken Rules of Legal Ethics
letters and other documents are drawn, so usage of
phrases/words deviating from that which are so The ethics learned in law school and
common ground (although you may be linguistically subsequent courses as part of my legal
right) may not be appreciated. What to do? Observe or education all sounded like a set of rules which
ask for samples from the clerks or other lawyers, and members of a legal profession had to abide.
imitate what you find from your own fair observation For example, legal ethics dictated that one
of what appears to be ‘standard’, and be prepared to must not mislead the court and whereas, the
take some beating when you err to do so. interaction between fellow members of the
Unless it is something unethical or highly impractical, Bar should be laced with ‘candour’ and
toe the line until you gain sufficient seniority to ‘courtesy’.
become a trend setter. At other times, the right
occasion must first be sought before voicing out one’s But true legal ethics is bigger than a set of
views of dissent (and even that comes with risks). rules, it ought to become an inherent trait and
quality of a practitioner. Afterall, ‘courtesy’ is
2.Creative Legal Research so broad - no rule of ethics could possibly
itemize every given situation of acceptable
Whenever one talks about legal research, most dive courtesy. It thus requires some
head-in into online legal databases in search of thoughtfulness to be imbued into ethics.
answers. That is however not always the fastest, best Some unspoken ones include greeting court
or even surest way to procure an answer. Instead, try a clerks and fellow lawyers in court and in
variation of the following when it opportune: appropriate occasions, to even given a
courtesy call to an adversary on a certain
a) Google Search, and surprise yourself with the course of direction which one may wish to
discovery of articles written by others with relevant take in each legal proceeding.
case citation which could be right to the point.
There was once when I was waiting in court
b) Do a court file search on relevant case laws to
discover how papers are prepared by more and another group of lawyers were set to
experienced practitioners for unfamiliar legal
proceedings. proceed for trial. When their matter was

c) For non-apex court reported cases, consider called, a lawyer stood up and requested
contacting the lawyers or even the court of the given
case. Why? Most cases only became ‘reported’ cases adjournment of the trial - parties had also
because a dissatisfied party appealed, forcing the
presiding court to provide its written grounds of consensually agreed to do so. The judge was
judgment which soon find their way into reported case
law, although subsequently overruled on appeal. however entirely unimpressed, as the court

d) Be familiar with the table of contents of the was not informed prior, and the judge had
various legal textbooks available in your firm.
Referring to a textbook in a specialized area of law can already spent the night before reading the
be faster way, than digging at a Lexis Nexis database.
brief. Parties were thus directed to proceed
e) Consider sourcing decided cases of your present
presiding judge. Judges are more likely inclined to with the trial regardless. Perhaps, some
follow their own past decided cases, albeit being
merely persuasive, since no judge likes to think that practical-common-sense-courtesy by writing
he/she decided wrongly in previous matters.
to the court earlier could had avoided the

embarrassment. 54

4.Be Service Orientated

03

Clients must be treated like babies, as there are
no legal and advocacy skills to perform, if there
are no clients. It is not an understatement to call
each client a ‘baby’, as every client appoints a
lawyer to champion and to fight for their course.
In that respect, clients ‘demand’ to see that their
lawyer actively and passionately engages in
their matter. To continue this ongoing
relationship with a client, some lawyers believe
that attending regular social functions with a
client is necessary.

I believe, sticking to the following basics will be
most helpful, such as:

a)Keeping clients closely informed on the
progress of their matter from time to time
through emails, text messages and even phone
calls make a huge difference. A common
complaint of client dissatisfaction is often that
their lawyer was either too busy, uncontactable
or were not properly informed over their
matter.

b)Adopting effective communication with a
client through baby step explanations. For
instance, rather than saying, “We can procure an
ex parte interim prohibitory injunction against
your abusive husband”, say instead, “We can get
a court order to stop your husband from
continuing his abuse”.

c)Offer viable and practical solutions to a client’s
problem. That includes recognizing that
contesting a matter head-on in court is not
necessary a good solution, even if procedurally
possible. Sometimes, taking leverage over a
weakness of an adversary’s position can prevent
costly litigation, as it so often happens in the
popular American legal drama series, The Suits.

d)It goes without saying that in all ongoing files,
keep to court datelines and continue to mend
the fort.

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