Brokers, traders need to audit their systems every six months; penalties higher now.
Market regulator Sebi on Tuesday tightened algorithmic trading norms by making it mandatory for stock brokers and trading members to audit their systems every six months.
Sebi has also increased the penalties on errant stock brokers.
Algorithmic trading refers to orders generated at a high speed by use of advanced mathematical models that involve automatic execution of trades. This is mostly used by institutional investors.
In a bid to avoid systemic risks arising out of the algorithmic trade, Sebi in March last year had come up with certain guidelines.
The market regulator rolled out the final guidelines on Tuesday as per the representation made through its technical advisory committee. These will be effective May 27.
Stockbrokers and trading members concerned will have to take immediate corrective actions to rectify any possible deficiencies in this regard, Sebi said in a circular
In case of serious deficiencies or issues or failure to take satisfactory corrective action, the broker or trading member concerned would be barred from using the trading software till the time such issues are rectified and a satisfactory system audit report is submitted to the stock exchange.
“Deficiencies identified during the process of system audit of trading algorithm should be reported immediately by the users. Those who fail to report issues will have to pay suitable penalties imposed by Sebi or the stock exchanges,” Sebi said in the circular.
Also, the regulator has asked exchanges to put in place effective economic disincentives on high daily order-to-trade ratio of algorithmic orders of the users.
Sebi has also asked exchanges to impose additional penalty in the form of suspension of proprietary trading right of erring members for the first trading hour on the next trading day.
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