NOTICE
CSE/Notices/SEBI/2012/066
April
03, 2012
Trading members are hereby informed that the Exchange has received a Circular from SEBI vide Ref. No.CIR//MRD/DP/09/2012, dated March 30, 2012 regarding Broad Guidelines on Algorithmic Trading. The contents of the said Circular are reproduced hereunder for information of the trading members.
CIR/MRD/DP/
09 /2012
March
30, 2012
To
All
Stock Exchanges
Sir /
Ma’am,
Sub:
Broad Guidelines on Algorithmic Trading
1. It
has been observed that adoption of technology for the purpose of trading in
financial instruments has been on a rise over the past few years. Stock brokers
as well as their clients are now making increased usage of trading algorithm
(hereinafter referred to as “algo”).
2.
Based on recommendations of Technical Advisory Committee (TAC) and Secondary
Market Advisory Committee (SMAC), it has been decided to put in place the
following broad guidelines for algorithmic trading in the securities market.
Definition
3.
Algorithmic Trading – Any order that is generated using automated execution
logic shall be known as algorithmic trading.
Guidelines
to the stock exchanges and the stock brokers
4.
Stock exchanges shall ensure the following while permitting algorithmic trading
(i) The
stock exchange shall have arrangements, procedures and system capability to
manage the load on their systems in such a manner so as to achieve consistent
response time to all stock brokers. The stock exchange shall ontinuously study
the performance of its systems and, if necessary, undertake system upgradation,
including periodic upgradation of its surveillance system, in order to keep
pace with the speed of trade and volume of data that may arise through
algorithmic trading.
(ii) In
order to ensure maintenance of orderly trading in the market, stock exchange
shall put in place effective economic disincentives with regard to high daily
order-to-trade ratio of algo orders of the stock broker. Further, the stock
exchange shall put in place monitoring systems to identify and initiate
measures to impede any possible instances of order flooding by algos.
(iii)
The stock exchange shall ensure that all algorithmic orders are necessarily
routed through broker servers located in India and the stock exchange has
appropriate risk controls mechanism to address the risk emanating from
algorithmic orders and trades. The minimum order-level risk controls
shallinclude the following:
a. Price
check - The price quoted by the order shall not violate the price bands
defined by the exchange for the security. For securities that do not have price
bands, dummy filters shall be brought into effective use to serve as an
early warning system to detect sudden surge in prices.
b. Quantity
Limit check - The quantity quoted in the order shall not violate the
maximum permissible quantity per order as defined by the exchange for the
security.
(iv) In the interest of orderly trading and market integrity, the stock exchange shall put in place a system to identify dysfunctional algos (i.e. 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. Further, in exigency, the stock exchange should be in a position to shut down the broker’s terminal.
(v)
Terminals of the stock broker that are disabled upon exhaustion of collaterals
shall be enabled manually by the stock exchange in accordance with its risk
management procedures.
(vi) The stock exchange may seek details of trading strategies used by the algo for such purposes viz. inquiry, surveillance, investigation, etc.
(vii)
The stock exchange shall include a report on algorithmic trading on the stock
exchange in the Monthly Development Report (MDR) submitted to SEBI inter-alia
incorporating turnover details of algorithmic trading, algorithmic trading as
percentage of total trading, number of stock brokers / clients using
algorithmic trading, action taken in respect of dysfunctional algos, status of
grievances, if any, received and processed, etc.
(viii)
The stock exchange shall synchronize its system clock with the atomic clock
before
the start of market such that its clock has precision of atleast one icrosecond
and accuracy of atleast +/- one millisecond.
5. Stock
exchange shall ensure that the stock broker shall provide the facility of
algorithmic trading only upon the prior permission of the stock exchange. Stock
exchange shall subject the systems of the stock broker to initial conformance
tests to ensure that the checks mentioned below are in place and that the stock
broker’s system facilitate orderly trading and integrity of the securities
market. Further, the stock exchange shall suitably schedule such conformance
tests and thereafter, convey the outcome of the test to the stock broker.
For
stock brokers already providing algo trading, the stock exchange shall ensure
that the risk controls specified in this circular are implemented by the stock
broker.
Additionally,
the annual system audit report for a stock broker, as submitted to the stock
exchange, shall include a specific report ensuring that the checks are in
place. Such system audit shall be conducted by Certified Information System
Auditors (CISA) empanelled by stock exchanges. Further, the stock exchange
shall subject the stock broker systems to more frequent system audits, if
required.
6. The
stock broker, desirous of placing orders generated using algos, shall satisfy
the stock exchange with regard to the implementation of the following minimum
levels of risk controls at its end –
(i)
Price check – Algo orders shall not be released in breach of the price bands
defined by the exchange for the security.
(ii)
Quantity check – Algo orders shall not be released in breach of the quantity
limit as defined by the exchange for the security.
(iii)
Order Value check - Algo orders shall not be released in breach of the ‘value
per
order’ as defined by the stock exchanges.
(iv)
Cumulative Open Order Value check – The individual client level cumulative open
order value check, may be prescribed by the broker for the clients.
Cumulative
Open Order Value for a client is the total value of its unexecuted orders
released from the stock broker system.
(v)
Automated Execution check – An algo shall account for all executed, unexecuted
and unconfirmed orders, placed by it before releasing further order(s).
Further, the algo system shall have pre-defined parameters for an automatic
stoppage in the event of algo execution leading to a loop or a runaway
situation.
(vi) All
algorithmic orders are tagged with a unique identifier provided by the stock
exchange in order to establish audit trail.
7. The
other risk management checks already put in place by the exchange shall
continue and the exchange may re-evaluate such checks if deemed necessary in
view of algo trading.
8. The
stock broker, desirous of placing orders generated using algos, shall submit to
the respective stock exchange an undertaking that –
(i) The
stock broker has proper procedures, systems and technical capability to
carry
out trading through the use of algorithms.
(ii)
The stock broker has procedures and arrangements to safeguard algorithms
from
misuse or unauthorized access.
(iii)
The stock broker has real-time monitoring systems to identify algorithms that
may not
behave as expected. Stock broker shall keep stock exchange informed of such
incidents immediately.
(iv)
The stock broker shall maintain logs of all trading activities to facilitate
audit trail. The stock broker shall maintain record of control parameters,
orders, trades and data points emanating from trades executed through algorithm
trading.
(v) The
stock broker shall inform the stock exchange on any modification or change to
the approved algos or systems used for algos.
9. The
stock exchange, if required, shall seek conformance of such modified algo or
systems to the requirements specified in the circular.
10.
Stock exchanges are directed to:
(i)
take necessary steps and put in place necessary systems for implementation of
the above within a period of one month from the date of this circular.
(ii)
make necessary amendments to the relevant bye-laws, rules and regulations for
the implementation of the above decision.
(iii)
bring the provisions of this circular to the notice of the stock brokers of the
stock exchange and also to disseminate the same on the website.
(iv)
For stock brokers that are currently executing orders through algos, a period
of three months is provided to the stock exchanges within which the approval
process shall be completed and minimum risk controls shall be established, if
not already done.
(v)
communicate to SEBI, the status of implementation of the provisions of this
circular
in the Monthly Development Report.
11.
This circular is being issued in exercise of powers conferred under Section 11
(1) of the Securities and Exchange Board of India Act, 1992 to protect the
interests of investors in securities and to promote the development of, and to
regulate the securities market.
Yours
faithfully,
Harini
Balaji
Deputy
General Manager
022-26449372
Unquote:
Trading
Members are requested to take note of the aforesaid guidelines of SEBI and
ensure compliance.
M.A.V. Raju
Deputy General Manager