The Securities and Exchange Board of India (Sebi) has put in place additional checks and balances for algorithmic trading to minimise the possibilities of any flash crash in the Indian capital market. The guidelines come close on the heels of the regulator expressing its concerns on the increased usage of algos by market players.
The capital market regulator has directed stock exchanges to put in place effective economic disincentives to ensure maintenance of orderly trading in the market. Exchanges have also been told to put in place monitoring systems to identify and initiate measures to impede any possible instances of order flooding by algos.
The guidelines also call for algo orders to be necessarily routed through broker servers located in India apart from built-in risk controls like price and quantity limit checks. In other words,algos cannot violate the price bands or quantity limits prescribed by the exchange.
Exchanges also need to have in place a system to identify dysfunctional algos and should be in a position to advise members to shut down and remove any outstanding orders in the system that have emanated from such algos. Further,in exigency,the stock exchange should be in a position to shut down the brokers terminal,says Sebi.
Stock exchange have also been given authority to seek details of trading strategies used by the algo for purposes like inquiry,surveillance,investigation,etc.
Meanwhile,stock brokers will have to ensure that all algorithmic orders are tagged with a unique identifier provided by the stock exchange in order to establish audit trail. Brokers also need to have real-time monitoring systems to identify algos that may not behave as expected and will have to inform the exchanges immediately.