Sebi doubles penalty for 'empty' algo orders

Also recommends suspending proprietary trading account of brokers routinely engaged in such activities

The Securities and Exchange Board of India (Sebi) has doubled the penalty on algorithmic trading entities that place a large number of orders which do not translate into deals. It also recommended suspending the proprietary trading accounts of brokers routinely engaged in such activities, according to a Sebi circular issued today. The circular is effective May 27.

A large number of orders that don’t translate to deals affect the efficiency of exchange systems and add little to liquidity. Following a Sebi circular in March 2012, stock exchanges had implemented a framework of disincentives for high daily order-to-trade ratio of orders from trading algorithms by prescribing penalties in form of “charges to be levied per algo order” at various levels of the 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 order,” said today’s circular. “Stock exchanges shall impose an additional penalty in the form of suspension of the 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 penalised for maintaining high daily order-to-trade ratio,” it added.

Suspension would only be applicable if a stock broker is penalised on more than 10 occasions in the previous 30 trading days.

Sebi has also said algorithmic trading systems should be subject to a six-monthly audit and has asked exchanges to periodically review their surveillance arrangements to better detect and investigate market manipulation and disruptions.