Broad Guidelines on Algorithmic Trading for National Commodity Derivatives Exchanges

SEBI/HO/CDMRD/DMP/CIR/P/2016/97 · 2016-09-27 · SEBI Division of Market Policy, Commodity Derivatives Market Regulation Department

Summary

This circular consolidates norms for algorithmic trading in National Commodity Derivatives Exchanges under Section 131(B) of the Finance Act, 2015. It mandates that exchanges maintain robust system capacity and implement strict risk controls, including order-to-trade ratios and rate limits. The document outlines specific prohibitions on certain order types and requires comprehensive surveillance and compliance reporting by members. The document specifies additional system auditor certifications and mandates frequent audits for member systems. It outlines mandatory risk control checks, including price limits and order tagging, required before algorithmic orders are released. Finally, it establishes reporting obligations to SEBI and sets the effective date of the circular as September 29, 2016.

Text

Rules made by erstwhile FMC applicable to recognised associations continue in force for one year from FCRA repeal or till SEBI notification.

Any order generated using automated execution logic shall be known as algorithmic trading.

Exchange trading system capacity should be at least four times peak order load and upgraded regularly to manage load and ensure consistent response time.

Exchanges must ensure clear classification of algorithmic orders in terms of CTCL terminal code/ATS User ID approved for algorithmic trading.

Orders of clients are routed through member server only and client orders are not placed directly to the Exchange System.

Exchanges shall not approve algorithms that may not be conducive to efficient price discovery or fair play.

Exchange shall subject systems of members to initial conformance tests and ensure checks mentioned in guidelines are in place.

Immediate Or Cancel (IOC) orders shall not be allowed to be placed using algorithmic trading.

Algorithms taking liquidity away shall not be approved; exchanges must record reasons for approval and conduct half-yearly reviews.

Exchange should exercise caution allowing algorithmic trading in mini/micro contracts, considering liquidity and disadvantage to small participants.

Facilities putting some members at disadvantage shall not be allowed; algorithmic trading not permitted from Exchange hosted CTCL terminals.

Economic disincentives apply for daily algorithmic order-to-trade ratio: NIL up to 50, 1 paise for 50-250, 5 paise for 250-500 and 500+.

Source: SecMarx — Broad Guidelines on Algorithmic Trading for National Commodity Derivatives Exchanges. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.