Apr 2, 2012

SEBI issues Guidelines on Algorithmic Trading

Share on
SEBI issues Guidelines on Algorithmic Trading
With the increasing trend amongst capital market players of generating orders through automated execution logic called Algorithmic Trading, Securities & Exchange Board of India (SEBI) on 30th March, 2012 vide circular dated CIR/MRD/DP/ 09 /2012 have formulated broad guidelines to be followed by both Stock Exchanges and Stock Brokers for Algorithmic Trading.
These guidelines permits secure systems for algorithmic trading and help to keep pace with the speed of trade and volume of data that may arise through it.
Broadly the Guidelines provides for following directions to Stock Exchanges amongst others:

  • To have arrangements, procedures and systems to adequately manage the trade load of algorithm orders.
  • To put in place effective economic disincentives with regard to high daily order to trade ratio of algorithm orders.
  • To ensure all trades are routed through servers of stock brokers located in India only.
  • To have appropriate risk control mechanisms covering price band check and quantity limit check.
  • To report algorithmic trading details in the Monthly Development Report submitted to SEBI.
  • To ensure that the stock brokers provide the facility of algorithmic trading only after obtaining prior permission of the stock exchanges.
For Stock Brokers the new Guidelines provides for followings:

  • Stock Brokers are directed to implement the minimum levels of risk controls and shall ensure that the algorithm orders are not released in breach of price band check, Quantity limit check, Value per order check.
  • Stock Brokers are directed to prescribe individual client level cumulative open order value check.
  • To have pre- defined parameters for algorithm systems, for an automatic stoppage if algorithm execution leads to loop or a runaway situation.
  • To tag algorithm orders with a unique identifier which is provided by the Stock Exchanges to establish audit trail.
  • To include a specific report ensuring that the checks are in place in the annual system audit report submitted by the Stock Brokers to Stock Exchanges.
  • Stock brokers interesting in Algorithmic Trading are required to submit to Stock exchanges undertakings w.r.t. having proper procedures, systems and technical capability to carry such trades, safeguards to protect any misuse, real time monitoring system and logs of all trading to facilitate audit trail etc.
Further, all other existing risk management checks of the exchanges shall continue with the discretion in the hands of the exchanges to re-evaluate such checks, if deemed necessary. A period of one month is granted to all Stock Exchanges to take required step for putting systems in place and make relevant amendments in bye laws, rules and regulations.
A period of three months is granted to stock brokers that are currently executing orders through algorithm to comply with the aforesaid Guidelines.
Request a Call