Sebi looks to widen direct trading access; retail investors could benefit

Sebi has proposed allowing all categories of investors, including retail participants, to use Direct Market Access (DMA), a facility that enables orders to be placed directly into a stock exchange's trading system through a broker's infrastructure.

In Short

• Sebi proposes Direct Market Access (DMA) for all investors, including retail
• Proposal aims to improve efficiency and flexibility for retail traders
• Stronger cybersecurity and simplified tech regulations also proposed

Retail investors may soon get the same direct trading access that is currently available only to institutional investors.

Sebi (Securities and Exchange Board of India) has proposed allowing all categories of investors, including retail participants, to use Direct Market Access (DMA), a facility that enables orders to be placed directly into a stock exchange's trading system through a broker's infrastructure. The proposal is part of a broader effort to simplify technology-related regulations governing stock exchanges, clearing corporations and depositories.

The regulator has invited public comments on the proposals through a consultation paper released on Monday.

WHAT IS DIRECT MARKET ACCESS?

Direct Market Access, or DMA, allows investors to place buy and sell orders directly into the exchange trading system without manual intervention from a broker's dealer.

At present, this facility is largely restricted to institutional investors. Sebi now believes that advances in technology have made it possible to extend the benefits of DMA to a wider group of market participants.

According to the consultation paper, the regulator is considering removing the existing restriction and allowing all investors to access the facility, subject to appropriate risk management and operational safeguards.

WHAT COULD CHANGE FOR RETAIL INVESTORS?

If the proposal is approved, retail investors would be able to access exchange trading systems more directly through their brokers.

The move is expected to improve efficiency and offer investors greater flexibility in placing orders. However, brokers would still be required to maintain risk controls and monitoring systems to ensure market safety.

Sebi noted that technological advancements now make it feasible to extend DMA beyond institutional clients.

COMMODITY DERIVATIVES SEGMENT MAY ALSO SEE CHANGES

Sebi has also proposed changes to DMA rules in the commodity derivatives market.

Currently, certain provisions specifically refer to foreign portfolio investors (FPIs). The regulator has suggested removing this reference, which would allow all eligible investors to use the DMA facility in commodity derivatives, subject to exchange rules.

The proposal follows requests from exchanges to bring greater consistency across different market segments.

Under the new framework, exchanges would have the flexibility to determine the categories of investors eligible for DMA in exchange-traded commodity derivatives, similar to the approach followed in other segments.

RELIEF PROPOSED FOR INVESTMENT MANAGERS

In another notable proposal, Sebi has suggested removing the requirement that investment managers placing DMA orders on behalf of clients must be registered with the regulator.

However, clients would remain contractually responsible for the actions of the managers they appoint.

The change is aimed at simplifying operational requirements while maintaining accountability.

Further, the market regulator has proposed combining technology-related rules for securities exchanges and commodity derivatives exchanges into a single framework. At the same time, it plans to introduce a separate circular covering common information technology requirements.

These would include areas such as cybersecurity, disaster recovery systems, system audits and capacity planning.

The regulator believes that a consolidated approach could reduce duplication and make compliance easier for market institutions.

STRONGER CYBERSECURITY MEASURES PROPOSED

The consultation paper also outlines several cybersecurity-related changes.

Instead of referring to specific encryption standards, Sebi has proposed requiring exchanges to adopt strong and up-to-date cryptographic technologies.

Other proposals include mandatory two-factor authentication for system access, stronger firewall controls, and network segmentation.

WHAT HAPPENS NEXT?

The proposals are currently at the consultation stage, and Sebi has invited feedback from market participants and other stakeholders.

After reviewing the comments received, the regulator will decide on the final framework.

If implemented, the changes could mark a significant step towards broader market access for retail investors while also simplifying and modernising the technology rules that govern India's financial markets.

- Ends