SEBI decided to Enforce Broad Guidelines for Algorithmic Trading in the Securities Market

The Securities and Exchange Board of India (SEBI) on 31 March 2012 issued broad guidelines on Algorithmic Trading. Based on recommendations of technical advisory committee (TAC) and secondary market advisory committee (SMAC), SEBI decided to enforce broad guidelines for algorithmic trading in the securities market.

The market regulator directed stock exchanges to undertake system upgradation, including periodic upgradation of its surveillance system so as to keep pace with the speed of trade and volume of data that may arise through algorithmic trading. Also, the stock exchanges were asked to put in place monitoring systems to identify and initiate measures to impede any possible instances of order flooding through this system.

It is for the stock exchanges to ensure that all algorithmic orders are necessarily routed through broker servers located in India. The stock exchange has appropriate risk controls mechanism to address the risk emanating from algorithmic orders and trades.

SEBI highlighted that the minimum order-level risk controls include:
•    Price check - the price quoted by the order is not to violate the price bands defined by the exchange for the security.
•    Quantity limit check — the quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.

Stock exchanges are to seek details of strategies used by algo traders for inquiry, surveillance, investigation and the like. The stock exchange is to also include a report on algorithmic trading on the stock exchange in the monthly development report.

SEBI further mentioned that stock exchanges shall subject the systems of the stock broker to initial conformance tests to ensure that the checks mentioned are in place and that the stock broker’s system facilitate orderly trading and integrity of the securities market.