Press Information Bureau

Government of India

Ministry of Finance

05-September-2012 18:23 IST

Risk Management System For Trading in Stocks

Securities and Exchange Board of India (SEBI) has put in place appropriate system for monitoring Algorithmic or Algo Trading in the India stock market. Salient points of the guidelines prescribed by SEBI on algorithmic trading includes, inter alia, risk management measures for Algorithmic (Algo) trading. The measures taken are placed hereunder:

1. 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.

2. The stock exchanges shall put in place effective economic disincentives with regard to high daily order-to-trade ratio of algo orders.

3. The stock exchange shall have appropriate risk controls mechanism to address the risk emanating from algorithmic order and trades.

4. Stock exchanges shall have a system to identify dysfunctional algos and take suitable measures including advising the member, to shut down such algos and remove and outstanding orders in the system that have emanated from such dysfunctional algos.

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.

6. The stock broker, desirous of placing orders generated using algos, shall satisfy the stock exchange with regard to the implementation of the minimum levels of risk controls at its end viz. Price check, Quantity check, Order Value check, Cumulative Open Order Value check and Automated Execution check.

7. Stock brokers to submit an undertaking to the respective stock exchange that, they have proper procedures, systems and technical capability to carry out trading through the use of algorithms and have real-time monitoring systems to identify algorithms that may not behave as expected.

8. SEBI has not come across any such instances of merchant banker intentionally not replying to the queries raised by it relating to IPOs.

9. To check volatility in the price of any IPO on its listing day, SEBI has put in place a pre-open call auction mechanism for IPOs on the first day of trading and a framework of trade controls applicable to the normal trading session of IPO scrips.

This information was given by the Minister of State for Finance, Shri Namo Narain Meena in written reply to a question in Lok Sabha today.

* * *

DSM/RS/Hb

Algorithmic trading regulation: exchanges must implement risk controls and monitoring to manage order-to-trade ratios and dysfunctional algos. Regulatory guidance requires exchanges and brokers to implement comprehensive risk management controls for algorithmic trading: exchanges must manage system load and consistent response times, apply economic disincentives for high order to trade ratios, identify and disable dysfunctional algos and remove their orders. Brokers may provide algorithmic trading only with prior exchange permission and must implement minimum controls-price, quantity, order value, cumulative open order value and automated execution checks-and maintain real time monitoring and undertakings confirming technical capability.