CIRCULAR, CIR/MRD/DP/ 16
/2013, dated May 21, 2013
To,
All
Stock Exchanges
Please
refer to SEBI Circular No.CIR/MRD/DP/09/2012 dated March 30, 2012 on ‘Broad Guidelines
on Algorithmic Trading’.
2.
SEBI has received various suggestions with regard to the requirement of system
audit of trading algorithm / software used by stock brokers / trading members.
After due examination of the suggestions in consultation with the Technical
Advisory Committee, it has been decided to revise the requirement as follows:
2.1. The stock brokers / trading
members that provide the facility of algorithmic trading shall subject their
algorithmic trading system to a system audit every six months in order to
ensure that the requirements prescribed by SEBI / stock exchanges with regard
to algorithmic trading are effectively implemented.
2.2. Such system audit of
algorithmic trading system shall be undertaken by a system auditor who possess
any of the following certifications:
(a) CISA (Certified Information
System Auditors) from ISACA;
(b) DISA (Post Qualification
Certification in Information Systems Audit) from Institute of Chartered
Accountants of India (ICAI);
(c) CISM (Certified Information
Securities Manager) from ISACA;
(d) CISSP (Certified Information
Systems Security Professional) from International Information Systems Security
Certification Consortium, commonly known as (ISC)2.
2.3. Deficiencies or issues
identified during the process of system audit of trading algorithm / software
shall be reported by the stock broker / trading member to the stock exchange
immediately on completion of the system audit. Further, the stock broker /
trading member shall take immediate corrective actions to rectify such
deficiencies / issues.
2.4. In case of serious
deficiencies / issues or failure of the stock broker / trading member to take satisfactory
corrective action, the stock exchange shall not allow the stock broker /
trading member to use the trading software till deficiencies / issues with the
trading software are rectified and a satisfactory system audit report is
submitted to the stock exchange. Stock exchanges may also consider imposing
suitable penalties in case of failure of the stock broker / trading member to
take satisfactory corrective action to its system within the time-period specified
by the stock exchanges.
3.
In order to further strengthen the surveillance mechanism related to
algorithmic 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. Stock
exchanges shall periodically review their surveillance arrangements in order to
better detect and investigate market manipulation and market disruptions.
4.
As directed vide circular dated March 30, 2012 stock exchanges have implemented
a framework of economic disincentives for high daily order-to-trade ratio of
orders placed from trading algorithms by prescribing penalties in form of 'charges
to be levied per algo orders' at various levels of daily order-to-trade
ratio. 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.
5.
In order to discourage repetitive instances of high daily order-to-trade ratio,
stock exchanges shall impose an additional penalty in form of suspension of proprietary
trading right of the stock broker / trading member for the first trading hour
on the next trading day in case a stock broker / trading member is penalized
for maintaining high daily order-to-trade ratio, provided penalty was imposed
on the stock broker / trading member on more than ten occasions in the previous
thirty trading days.
6.
The circular shall be applicable with effect from May 27, 2013.
7.
Stock Exchanges are directed to:
7.1. take necessary steps and put
in place necessary systems for implementation of the above.
7.2. make necessary amendments to
the relevant bye-laws, rules and regulations for the implementation of the
above decision.
7.3. bring the provisions of this
circular to the notice of the stock brokers / trading members of the stock
exchange and also disseminate the same on their website.
8.
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.
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