Sebi sets curbs on algorithmic trading

The Securities and Exchange Board of India (Sebi) released broad guidelines which would put a check on algorithmic trading programmes, including measures to check an excessive flood of orders or irregular price quotations.

The regulator has asked exchanges to put in place necessary systems as per the latest guidelines within a month for reining in algorithmic traders.

All brokers would need prior exchange permission before offering algorithmic trading to their clients. Those brokers who are already trading through algorithmic traders would be vetted for risk management systems within a period of three months, according to the Sebi circular issued on Friday.

Exchanges have been asked to put in place economic disincentives for those giving a high number of orders as a proportion of actual executed trades, and to prevent order flooding.

Athul Kudva, director of Omnesys Technologies, a firm involved in providing algorithmic trading solutions, said the move was aimed at preserving market integrity. “This would discourage traders from flooding the market by placing orders at prices where they would not be executed. It would also act as a measure against system bugs and market manipulation,” he said.

Algorithms would not be allowed to quote beyond a certain number of securities per orders.

They cannot quote prices in violation of existing price bands. Even on stocks without price bands, a dummy filter would act as an early warning system to detect sudden surge in prices.

Exchanges have been asked to ensure a consistent response time to all stock brokers. They have also been asked to synchronise their system clock with the atomic clock to precision of at least one microsecond and accuracy of at least one millisecond.

They have also been asked to regulate runaway algorithms. “The stock exchange shall put in place a system to identify dysfunctional algos (algos leading to loop or runaway situation) and take suitable measures, including advising the member, to shut down such algos and remove any outstanding orders in the system that have emanated from such dysfunctional algos,” said the circular.

In extreme situations, the stock exchange should be in a position to shut down the broker’s terminal, it said.