SEBI consultation paper on rise of Algo trading

on categorizing every order placed by an API as an algo order. SEBI is planning to come up with few regulations on algo trading and use of API for order placing, The broker will now have to get exchange approvals for any algo or program running with API for placing orders, Its extremely tedious and complex process, As per Sebi consultation paper, every API order should be tagged as its placed by the strategy used by any customer using APIs and also validate that the order being placed is from that strategy itself. The facility of algo trading shall be provided by the stockbroker after obtaining permission of the stock exchange. All algo orders shall necessarily be routed through broker servers located in India and the stock exchange should have an appropriate risk controls mechanism to address the risk emanating from algo orders.   All algo orders shall be tagged with a unique identifier provided by the stock exchange in order to establish an audit trail and the stockbroker shall seek approval from the Exchange for any modification or change to the approved algos or systems used for algos.  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 stockbroker, desirous of placing orders generated using algos, shall satisfy the Exchange with regard to implementation of minimum levels of risk controls at its end such as price check, quantity check, order value check, cumulative open order value check, automated execution check etc.  Stockbroker shall ensure that the price quoted by the order shall not violate the price bands defined by the stock exchange.   Stock exchange shall identify the dysfunctional algos (i.e. algos leading to loop or runaway situation) and take suitable measures, including advising the broker, to shut down such algos and remove any outstanding orders in the system that have emanated from such dysfunctional algos.    Further, in an exigency, the stock exchange should be in a position to shut down the broker’s terminal.  Stock  Exchanges have  put in place processes for  algos where brokers file necessary documentation including system audit reports of mandatory pre trade risk checks, controls and testing before an algo is deployed for trading. Brokers are required to identify algo orders (including those provided by Computer to Computer Link (CTCL) vendors) and have to tag their algo orders appropriately with unique ‘Algo ID’ as assigned to the algo by the Exchange. This essentially means that all brokers will have to stop offering APIs. 

The Exchange & Sebi would have received many complaints on the third party algo trading or automation trading providers, As people accrued the losses due to unauthorized third party automation software. While the services of these third-party applications/algo providers/vendors are being increasingly used by investors (especially retail investors), it is observed that such algos are being deployed without taking requisite approvals from the Exchanges as per the extant provisions.

If you are concerned about this, please send your comments on the consultation paper  please email to sushmau@sebi.gov.in