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SEBI issues guidelines for algorithmic trading in commodity market
Sep-28-2016

In order to regulate algorithmic or 'algo' trading in the commodity market, the market regulator Securities and Exchange Board of India (SEBI) has issued detailed guidelines for regulation of 'algo' trading. Under the new norms, commodity exchanges will be able to process 20 orders per second from a user, irrespective of the order size. In case the order-to-trade ratio of a member reaches 500 during a trading day, the member will not be allowed to place any order for the first 15 minutes on the next trading day as a cooling off action.

The guidelines also states that stock exchanges will have to ensure that immediate or cancel orders are not placed through the algo trade route. It added that only a portion of orders placed through trading terminals are executed due to non-fulfilment of certain conditions or cancellation by clients. Based on the daily order-to-trade ratio of the client, an additional charge ranging from 1-5 paise will be imposed on all algo orders.

For the purpose of calculation of daily order-to-order ratio, all algorithmic orders, i.e. order entry, order modifications and order cancellation shall be considered. Sebi said that the exchanges would have to continuously study the performance of its systems and, if necessary, undertake system upgrade, including periodic upgrade of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algo trading. The regulator asked commodities exchanges to submit a monthly report on algo trading, including its percentage in total trade and the number of members of using such trading.

The regulator proposed that, the capacity of trading system of the Exchange should be at least four times the peak order load encountered and the Exchange system should be upgraded on a regular basis. Maintaining efficiency for market participants, Sebi has not permitted stock exchange to host algorithmic trading via CTCL terminals. The regulator said that Co-Location, Co-Hosting or any other facility or arrangement which puts some members in disadvantageous position vis-à-vis other members shall not be allowed. It said that there will be some economic disincentives for algo trades based on the order-to-order ratio.

Algorithmic trading, mostly used by large institutional investors, refers to orders generated at a super-fast speed by use of advanced mathematical models that involve automated execution of trade.

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