Securities and Exchange Board of India, SEBI, Chairman U K Sinha had recently said that SEBI would be coming out with a fresh set of guidelines soon for algorithmic trading. The new regulations would be to curb the high order-to trade ratio, to discourage the practice of placing orders without an intention to execute those trades. We can also expect fresh regulations for testing algorithms by the exchanges before they go live.
According to the existing guidelines set by SEBI, regular audits are undertaken by exchanges as well as the regulator (SEBI) to ensure the guidelines are adhered to. For stock brokers who use Algorithmic Trading or provide the facility of Algorithmic Trading, half yearly audits are prescribed.
The audit framework suggested by SEBI is available at their website. Algorithmic traders fall under the category of Type III Broker and the audit framework document clearly specifies the areas which the auditor has check and consider while writing his report. A robust risk management system, which requires online real-time risk management system and trading limits to be in place, is one of the crucial aspects of the audit. The deficiencies and issues identified during the audits or reported back to the exchanges and the brokers are required to immediately take corrective measures.
Audits by SEBI and exchanges are necessary for stock brokers to avoid colossal errors on their part which could be catastrophic for themselves and the markets.
To be able to manage risk well while allowing the market to grow intelligently, a thorough knowledge of algorithmic trading, networking, and technology involved is required. It is very crucial that an optimum combination of checks and leverages are allowed for the market to remain flexible, adjust itself while avoiding losses and crashes from human or machine errors. We hope such efforts from SEBI and other regulators worldwide would result into a more mature and safe markets globally.
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