Tightening the norms for algorithmic trading, the Securities and Exchange Board of India (SEBI), on Tuesday, made it mandatory for the users to have their systems audited every six months, and increased penalties on errant stock brokers.
Algorithmic trading or ‘algo’ in market parlance refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade.
It is mostly used by large institutional investors. It has raised concerns that algo exposes small investors, and the market itself, to possible systemic risks.
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SEBI first issued guidelines on algo trades in March, 2012, after it witnessed a growing trend of usage of advanced technology for trading in financial instruments.
In a circular issued on Tuesday, SEBI said it had decided to review the algo guidelines following representations made by its Technical Advisory Committee, and the new norms would come into effect from May 27.
As per the amended guidelines, stock brokers and traders offering algo facility would need to subject their algorithmic trading system to audit every six months so as to ensure compliance with the requirements prescribed by Sebi and the stock exchanges. Such audits would need to be undertaken by a system auditor with relevant certifications.
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Sebi has also allowed the stock exchanges to impose “suitable penalties” in case of failure of the stock broker or trading member to take satisfactory corrective action within a time-period specified by the bourses.
The regulator has also asked the bourses to periodically review their surveillance arrangements to better detect and investigate market manipulation and market disruptions.