Panel sets norms for net trading

MUMBAI, DECEMBER 17: Internet trading is finally going to be a reality in India. The Securities and Exchange Board of India Sebi committ...

MUMBAI, DECEMBER 17: Internet trading is finally going to be a reality in India. The Securities and Exchange Board of India Sebi committee on internet trading has decided to allow the use of internet as an order routing system ORS through registered stock brokers. If the Sebi board approves the proposals this month, internet trading will kick off from the new millennium.

The Sebi committee which met here decided to restrict the scope of the first report to cover the issues directly related to internet trading through order routing systems. The use of internet for routing orders through a registered broker allows a client sitting in any part of the country to execute his trade on his own computer via the internet, thereby eliminating the delay in execution of trade.

Sebi has prescribed that exchanges must ensure that brokers have a system-based control on the trading limits of clients, and exposures taken by clients. Brokers must also set pre-defined limits on the exposure and turnover of each clientand the broker systems should be capable of assessing the risk of the client as soon as the order comes in. The client should be informed of acceptance/rejection of the order within a reasonable period.

In case system-based control rejects an order because of client having exceeded limits etc, the broker system may have a review and release facility to allow the order to pass through, SEBI said.

The introduction of ORS will lay the foundation for another round of segmentation of brokers8217; business. The competition at present confined to the terminals of the major exchanges BSE8217;s BOLT and NSE would now move to the arena of the brokers. The committee has recommended that the ORS be introduced through registered brokers and has prescribed a networth of Rs 50 lakh per broker to start this facility.

The committee recommended that stock exchanges ensure that a risk management system is in place. As a first step, exchanges have to grant permission to brokers intending to start the ORS facility. The stockexchange, before giving permission to brokers to start internet based services have to ensure the fulfilment of several conditions.

The stock exchange must ensure that the system used by the broker has provision for security, reliability and confidentiality of data through use of encryption technology. Records maintained in electronic form by the broker should not be susceptible to manipulation. Stock exchanges must develop uniform written procedures to handle contingency situations and for review of incoming and outgoing electronic correspondence.

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8220;It is desirable that participants use authentication technologies. For this purpose it should be mandatory for participants to use certification agencies as and when notified by Government/Sebi. They should also clearly specify when manual signatures would be required,8221; said the committee. The exchange must ensure that brokers have sufficient, verifiable information about clients, which would facilitate risk evaluation of clients and brokers must enter intoan agreement with clients spelling out all obligations and rights.

This agreement should also include inter alia, the minimum service standards to be maintained by the broker for such services specified by Sebi/exchanges for the internet based trading from time to time. Exchanges will prepare a model agreement for this purpose.