SEBI Guidelines on Algorithmic Trading

Large numbers of traders are using technology to enter into trading transactions wherein the transactions are automatically entered on the basis of a pre-determined logic or instructions without any human instructions these tradings are known as Algorithmic Trading. 

Although these transactions are permitted by SEBI yet the need for a mechanism to control such system was felt essential to avoid any manipulation. 

SEBI Guidelines vide circular dated 30th March 2012

In order to regulate such system board came up with a guidelines which states that - 

• The Stock Exchanges shall have the arrangements to manage the load on their system in such a manner so as to achieve consistent response time to all stock brokers
• Stock Exchange should ensure that all algorithmic orders are routed through brokers servers in India and proper risk control mechanism are in place
• There should be a Price Check, which ensures that the price quoted does not violate the price band defined by the exchange for the security. For securities with no price band dummy filters should be incorporated. 
• Quantity Check shall ensure that quantity uploaded in the order does not violate the maximum permissible quantity per order as defined by exchange
• The stock exchange need to include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI after incorporating details of algorithmic trading as a percentage of total trading, number of stock brokers, etc. 

SEBI Guidelines vide circular dated 21st May 2013

In order to ensure that all the stock brokers/ trading members are using a system which fulfills all the requirements of the above circular SEBI has revised the requirement of System Audit of trading algorithm/software used by the brokers. 

It requires that all the stock brokers/trading members that provide facility of algorithmic trading shall conduct a system audit every 6 months in order to ensure that all the requirements are fulfilled. The audit should be conducted by a system auditor who possess any of the following certification - CISA, DISA, CISM and CISSP. 

Any deficiency identified during the audit shall be reported immediately and in case of serious deficiency no trading through algorithmic software shall be permitted unless the deficiency is rectified. 

SEBI has also strengthen the surveillance mechanism.