Algorithmic trading (algo) in stock market parlance refers to orders generated at a super – fast speed by use of advanced mathematical models that involve automated execution of trade. This method of trading is mostly used by large institutional investors. The high frequency trading exposes the market to possible systemic (Universal) risks.
Any order that is generated using automated execution logic shall be known as algorithmic trading. With the increasing trend amongst capital market players of generating orders through automated execution logic called Algorithmic Trading.
SEBI have formulated broad guidelines to be followed by both Stock Exchanges and Stock Brokers for algorithmic trading and help to keep pace with the speed of trade and volume of data that may arise through it.
The Guidelines provide for following Directions to Stock Exchanges amongst others:
(i) To have arrangements, procedures and systems to adequately manage the trade load of algorithm orders.
(ii) To put in place effective economic disincentive with regard to high daily order to trade ration of algorithm orders.
(iii) To ensure all trades are routed through servers of stock brokers located in India only.
(iv) To have appropriate risk control mechanisms covering price band check and quantity limit check.
(v) To report algorithmic trading details in the Monthly Development Report submitted to SEBI.
(vi) To ensure that the stock brokers provide the facility of algorithmic trading only after obtaining prior permission of the stock exchanges.
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