Broad Guidelines on Algorithmic Trading
Summary
This SEBI circular establishes broad guidelines for algorithmic trading in the securities market based on recommendations from technical advisory committees. It mandates that stock exchanges implement specific system capabilities, risk controls, and monitoring mechanisms to ensure orderly trading and market integrity. The document outlines compliance requirements for stock brokers, including prior permission, conformance tests, and the implementation of minimum risk controls.
Text
Any order that is generated using automated execution logic shall be known as algorithmic trading.
The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all stock brokers.
In order to ensure maintenance of orderly trading in the market, stock exchange shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders of the stock broker.
The stock exchange shall ensure that all algorithmic orders are necessarily routed through broker servers located in India.
The price quoted by the order shall not violate the price bands defined by the exchange for the security.
The quantity quoted in the order shall not violate the maximum permissible quantity per order as defined by the exchange for the security.
In the interest of orderly trading and market integrity, the stock exchange shall put in place a system to identify dysfunctional algos (i.e. algos leading to loop or runaway situation) and take suitable measures.
The stock exchange may seek details of trading strategies used by the algo for such purposes viz. inquiry, surveillance, investigation, etc.
The stock exchange shall include a report on algorithmic trading on the stock exchange in the Monthly Development Report (MDR) submitted to SEBI inter-alia incorporating turnover details of algorithmic trading.
The stock exchange shall synchronize its system clock with the atomic clock before the start of market such that its clock has precision of atleast one microsecond and accuracy of atleast +/- one millisecond.
Stock exchange shall ensure that the stock broker shall provide the facility of algorithmic trading only upon the prior permission of the stock exchange.
Algo orders shall not be released in breach of the price bands defined by the exchange for the security.
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Source: SecMarx — Broad Guidelines on Algorithmic Trading. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.