SEBI issues measures to strengthen Algorithmic Trading and Co-location / Proximity Hosting framework

Apr 10, 2018 | by Avantis RegTech Legal Research Team

Securities and Exchange Board of India (SEBI) in order to address the concerns relating to algorithmic trading and colocation / proximity hosting facility offered by stock exchanges and to provide a level playing field between Algorithmic/ Co-located trading and manual trading it has been decided to introduce the following measures in connection with algorithmic trading and co-location / proximity hosting framework facility offered by stock exchanges.

Managed Co-location Service-

·       In order to facilitate small and medium sized Members, who otherwise find it difficult to avail colocation facility, due to various reasons including but not limited to high cost, lack of expertise in maintenance and troubleshooting, etc. to avail co-location facility, stock exchanges shall introduce ‘Managed Co-location Services’. Under this facility, space/rack in co-location facility shall be allotted to eligible vendors by the stock exchange along with provision for receiving market data for further dissemination of the same to their client members and the facility to place orders (algorithmic / non-algorithmic) by the client members from such facility.

·       The vendors shall provide the technical knowhow, hardware, software and other associated expertise as services to trading members and shall be responsible for upkeep and maintenance of all infrastructure in the racks provided to them.

·       In order to have fair competition, stock exchanges are advised to ensure that multiple vendors are permitted for providing Managed Co-location Services at their co-location facility.

 

Measurement of Latency for Co-location and Proximity Hosting -

·       It is mandatory for stock exchanges to publish suitable quarterly reports on their websites on latencies observed at the exchange.

·       Stock Exchanges shall also publish reference latency, which the time is taken for an order message to travel between a reference rack in the Colocation facility and the Core Router. Free of Charge Tick-by-Tick Data feed (TBT Feed)

·       Tick-by-Tick (TBT) data feed offered by stock exchanges provides a detailed view of the entire order-book, which includes details relating to addition, modification and cancellation of orders and trades on a real-time basis.

·       In order to create a more level playing field among the different types of market participants, Stock Exchanges shall provide TBT Feeds to all the trading members, free of cost, subject to trading members creating the necessary infrastructure for receiving and processing it.

·       After assessing the needs of the market participants, stock exchanges may increase the depth of snapshot of 5 best bid and ask quotes currently being provided by them. Penalty on Order to Trade Ratio (OTR)

·       In order to ensure enhanced surveillance, stock exchanges shall now allot a unique identifier to each algorithm approved by them. Stock exchanges shall ensure that every algorithm order reaching on exchange platform is tagged with the unique identifier allotted to the respective algorithm and that such unique identifier tags are part of the data set sent / shared with SEBI for surveillance purpose. Testing Requirement for Software and Algorithms

·       SEBI has prescribed the testing procedure to be followed by market participants before deployment of software and algorithms. In order to further streamline and strengthen the process of testing of software and algorithms, stock exchanges may provide a simulated market environment for testing of software including algos. Such a facility may be made available over and beyond the current framework of mock trading prescribed by SEBI.

·       Stock exchanges shall ensure that the tagging of each order each algorithm with its unique identifier is completed by September 30, 2018, while the other provisions of the circular shall be complied with at the earliest but not later than June 30, 2018.

·       Stock Exchanges are directed to:

a)       take necessary steps to put in place systems for implementation of the circular, including necessary amendments to the relevant bye-laws, rules and regulations;

b)      bring the provisions of this circular to the notice of the stock brokers / clearing members and also disseminate the same on their website;

c)       Communicate to SEBI the status of implementation of the provisions of this circular through monthly development report.

[SEBI/HO/MRD/DP/CIR/P/2018/62]

URL: https://www.sebi.gov.in/legal/circulars/apr-2018/measures-to-strengthen-algorithmic-trading-and-co-location-proximity-hosting-framework_38605.html


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