Mumbai: Tightening the norms for algorithmic trading, market regulator Sebi on Tuesday made it mandatory for the users to have their systems audited every six months and increased penalties on errant stock brokers.
Algorithmic trading or 'algo' in market parlance refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade.
It is mostly used by large institutional investors and has raised concerns that algo exposes small investors, and the market itself, to possible systemic risks.
Sebi first issued guidelines on algo trades in March 2012, after it witnessed a growing trend of usage of advanced technology for trading in financial instruments.
In a circular issued today, Sebi said it had decided to review the algo guidelines following representations made by its Technical Advisory Committee and the new norms will come into effect from May 27.
As per the amended guidelines, stock brokers and traders offering algo facility would need to subject their algorithmic trading system to audit every six months so as to ensure compliance with the requirements prescribed by Sebi and the stock exchanges.
Such audits would need to be undertaken by a system auditor with relevant certifications.
Sebi has also allowed the stock exchanges to impose "suitable penalties" in case of failure of the stock broker or trading member to take satisfactory corrective action within a time-period specified by the bourses.
"In order to further strengthen surveillance mechanism related to algo trading and prevent market manipulation, stock exchanges are directed to take necessary steps to ensure effective monitoring and surveillance of orders and trades resulting from trading algorithms," Sebi said.
The regulator has also asked the bourses to periodically review their surveillance arrangements to better detect and investigate market manipulation and market disruptions.
In March last year, Sebi had asked the exchanges to implement a framework of economic disincentives for high daily order-to-trade ratio for orders placed from trading algorithms by prescribing penalties in form of 'charges to be levied per algo orders' at various levels.
"The penalty rates specified by the stock exchanges have been reviewed and in order to provide sufficient deterrence, stock exchanges are directed to double the existing rates of 'charges to be levied per algo orders' specified in their circulars/notices," Sebi said.