ALGORITHMIC TRADING :
Any order that is generated using automated execution logic shall be known as algorithmic trading.
With the increasing trend amongst capital market players of generating orders through automated execution logic called Algorithmic Trading. SEBI 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 the following directions :
– The stock brokers / trading members that provide the facility of algorithmic trading shall subject to their algorithmic trading system to a system audit every six months in order to ensure that the requirements prescribed by SEBI / stock exchanges with regard to algorithmic trading are effectively implemented.
– Such system audit of algorithmic trading system shall be undertaken by a system auditor who possess any of the following certifications:
(a) CISA (Certified Information System Auditors) from ISACA;
(b) DISA (Post Qualification Certification in Information Systems Audit) from Institute of Chartered
Accountants of India (ICAI);
(c) CISM (Certified Information Securities Manager) from ISACA;
(d) CISSP (Certified Information Systems Security Professional) from International Information Systems
Security Certification Consortium, commonly known as (ISC).
– Deficiencies or issues identified during the process of system audit of trading algorithm / software shall
be reported by the stock broker / trading member to the stock exchange immediately on completion of the system audit. Further, the stock broker / trading member shall take immediate corrective actions to
rectify such deficiencies / issues.
– In case of serious deficiencies / issues or failure of the stock broker / trading member to take satisfactory corrective action, the stock exchange shall not allow the stock broker / trading member to use the trading software till deficiencies / issues with the trading software are rectified and a satisfactory system audit report is submitted to the stock exchange. Stock exchanges may also consider imposing suitable penalties in case of failure of the stock broker / trading member to take satisfactory corrective action to
its system within the time-period specified by the stock exchanges.
– Stock exchanges shall periodically review their surveillance arrangements in order to better detect and
investigate market manipulation and market disruptions.
– The penalty rates specified by the stock exchanges of ‘charges to be levied per algo orders’ are required
to be double.
– In order to discourage repetitive instances of high daily order-to-trade ratio, stock exchanges shall
impose an additional penalty in form of suspension of proprietary trading right of the stock broker /
trading member for the first trading hour on the next trading day in case a stock broker / trading member
is penalized for maintaining high daily order-to-trade ratio, provided penalty was imposed on the stock
broker / trading member on more than ten occasions in the previous thirty trading days.