In order to keep up with advances in technology involving securities trading, SEBI has issued to the stock exchanges broad guidelines on algorithmic trading in the securities markets. The concept of algorithmic trading is defined as any “order that is generated using automated execution logic”. Such trading is effected by automated electronic platforms that analyze split-second information and act at speeds not capable of being generated through human intervention.
In order to mitigate any risks from such trading, SEBI’s guidelines require stock exchanges to put in place mechanisms – “arrangements, procedures and system capability” – to deal with the speed and volume of trading. Further, the stock exchanges are to “ensure that all “algorithmic orders are necessarily routed through broker servers located in India”. They also require stock exchanges to ensure that brokers providing the facility of algorithmic trading satisfy certain basic requirements and comply with initial conformance tests.