The capital market regulator has put checks and balances in place for high-frequency trading. SEBI has issued detailed guidelines asking exchanges to contain possibilities of potential systemic risk caused by the use of sophisticated automated software by brokers to trade on stock exchanges.
The regulator said exchanges should ensure that all algorithmic orders, software driven automated order execution engines, are routed through broker servers located in India and have appropriate risk-control mechanism to address the risk emanating from algorithmic orders and trades.
SEBI said the minimum order-level risk controls should include a price and quantity limit 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,' SEBI said in a circular posted on its website on Friday.
'The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.'
Algorithmic trading or high-frequency trading strategies use mathematical models and powerful computers to order trades at lightning-fast speeds. As opposed to manually punched trades, these trades are faster and so stand to benefit from quick change in prices.
The regulator said in the interest of orderly trading and market integrity, exchanges should put in place a system to identify dysfunctional algorithm, which could lead to a runaway situation and take suitable measures, including advising the member, to shut down such algorithms and remove any outstanding orders in the system that have emanated from such dysfunctional algorithms. SEBI also said in exigency, the stock exchange should be in a position to shut down the broker's terminal.
The regulator said stock brokers desirous of placing orders generated using algorithms should give an undertaking to stock exchanges that they have real-time monitoring systems to identify algorithms that may not behave as expected.
Besides, stock brokers should maintain logs of all trading activities to facilitate audit trail. 'The stock broker shall maintain logs of all trading activities to facilitate audit trail,' SEBI said.
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The regulator said exchanges should ensure that all algorithmic orders, software driven automated order execution engines, are routed through broker servers located in India and have appropriate risk-control mechanism to address the risk emanating from algorithmic orders and trades.
SEBI said the minimum order-level risk controls should include a price and quantity limit 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,' SEBI said in a circular posted on its website on Friday.
'The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.'
Algorithmic trading or high-frequency trading strategies use mathematical models and powerful computers to order trades at lightning-fast speeds. As opposed to manually punched trades, these trades are faster and so stand to benefit from quick change in prices.
The regulator said in the interest of orderly trading and market integrity, exchanges should put in place a system to identify dysfunctional algorithm, which could lead to a runaway situation and take suitable measures, including advising the member, to shut down such algorithms and remove any outstanding orders in the system that have emanated from such dysfunctional algorithms. SEBI also said in exigency, the stock exchange should be in a position to shut down the broker's terminal.
The regulator said stock brokers desirous of placing orders generated using algorithms should give an undertaking to stock exchanges that they have real-time monitoring systems to identify algorithms that may not behave as expected.
Besides, stock brokers should maintain logs of all trading activities to facilitate audit trail. 'The stock broker shall maintain logs of all trading activities to facilitate audit trail,' SEBI said.
....more info