SEBI norms for automated trading

The Securities and Exchange Board of India (SEBI) has issued broad guidelines on Algorithmic Trading, that is, any order that is generated using automated execution. “It has been observed that adoption of technology for the purpose of trading in financial instruments has been on the rise over the past few years. Stock brokers as well as their clients are now making increased usage of trading algorithm,” SEBI said. The market regulator has asked stock exchanges to undertake system upgradation, including periodic upgradation of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algorithmic trading. Further, 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. “The stock exchange shall ensure that all algorithmic orders are necessarily routed through broker servers located in India and the stock exchange has appropriate risk controls mechanism to address the risk emanating from algorithmic orders and trades. Minimum order-level risk controls The SEBI said the minimum order-level risk controls include: Price check — the price quoted by the order shall not violate the price bands defined by the exchange for the security. For securities that do not have price bands, dummy filters shall be brought into effective use to serve as an early warning system to detect sudden surge in prices; 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. Keywords: Securities and Exchange Board of India, automated trading