Pre Approval for Algorithmic Trading (AT).

• Notice No: 20120430-36
• Notice Date: 30 Apr 2012
• Category: Others
• Segment: General

Pursuant to SEBI Circular No. CIR/MRD/DP/09/2012 dated 30^th March, 2012 (copy attached as Annexure 1) with regards to the Broad Guidelines on Algorithmic Trading (AT), all the trading members are required to obtain the prior permission of the Exchange before providing the facility of algorithmic trading to their clients.

The stock brokers already providing algorithmic trading facility, are also required to obtain the Exchange approval.

In view of the above the following process should be followed by the trading members :

A. (i) The trading members who are desirous of availing the facility of AT have to submit the prior approval application form as per format prescribed in Annexure 2.

    (ii) Such members have to get their system audits for AT done by any one of the following system auditors empanelled with the Exchange as per the scope of aforesaid SEBI Circular :

Sr.	Algorithmic Trading (AT)	AT System Audit Charges	Contact Persons Details
1	Deloitte Touche Tohmatsu India Private Ltd 12, Annie Beasant Rd, Opp. Shiv Sagar Estate, Worli, Mumbai-18	On Request	Mr.Shakti Mohanty [phone] Tel.[phone] Email/s : [e-mail]
2	Ernst & Young Pvt Ltd 6th Floor, Express Towers, Nariman Point, Mumbai 400021	On Request	Mr. Basant Shroff [phone] 022-40356333 Email : [e-mail]
3	Jain & Jain, Chartered Accountants 601, Jolly Bhawan No.2,51,. New Marine Lines, Mumbai 20	Rs. 15000/- per audit/per product/ per location*	Mr.Ajay Jain / Mr.Sujit Modi [phone] / [phone] Tel. [phone] Emails : [e-mail], [e-mail], [e-mail]
4	Kanhere Consultants Pvt. Ltd 4,Dwarka, Shastri Hall, J.Dadaji Road, Mumbai 400007	Rs. 15000/- per audit/per product/ per location*	Mr.Umesh Debar / Dr.Vishnu Kanhere [phone] / [phone] Tel: [phone] Emails : [e-mail], [e-mail]
5	Kochar Consultants Pvt.Ltd 302, Swapnabhoomi A Wing,  S.K. Bole Road, Nr Portuguese Church, Dadar (W), Mumbai 400028.	Rs. 15000/- per audit/per product/ per location*	Mr. Pranay Kochar [phone] Tel.: [phone] Emails : [e-mail], [e-mail]
6	Mittal & Associates, Chartered Accountants M K Bhavan, 1st Floor, 300, Shahid Bhagat Singh Rd, Fort, Mumbai 400001	Rs. 15000/- per audit/per product/ per location*	Mr. Mahendra Mehta / Ms. Suparna Kurgaonkar, [phone]/ [phone] Emails : [e-mail], [e-mail], [e-mail]

*15000 (plus auditors conveyance/traveling/accommodation charges as actuals (as per RBI practice audits) and applicable taxes

AT System audit charges should be paid directly by the member to the system auditor.

(iii) The system auditor/s will submit to the Exchange the AT system audits report and the Undertaking. (duly signed from the member as per the format prescribed in Annexure 3)

B.    The trading members who are already providing the facility of AT and who have intimated the same to the Exchange in the past have also to obtain the approval from the Exchange within three months from the date of the issue of SEBI Circular (i.e.on or before 30^th June,2012)as per the below mentioned procedure : 

(i) To conduct the AT system audit/s from any one of the aforesaid empanelled system auditors as per the scope of aforesaid SEBI Circular for all the AT locations.

(ii) The system auditor/s will submit to the Exchange the system audit report for AT and the Undertaking from the member as per the format prescribed in Annexure 3.

In both the above cases the Exchange will grant its approval for using algorithmic trading to such members only after confirming the compliances done with the provisions of the said SEBI Circular with regards to risk controls..

C.   Members are requested to ensure that the following 16 Digit Code ‘Location Ids’ should be used for trading mechanism for Algorithmic Trading :

Trading Mechanism	1st to 6th Digit Pin Code (Variable)	7th to 10th Digit Branch ID (Variable)	11th to 13th Digit User ID / Terminal ID (Variable)	14th Digit Check Digit/ (Fixed)	15th to 16th Digit Vendor Code (Variable)
1. Algorithmic Trading	400001	9999	203	1	xx
2. DMA Algorithmic     Trading	400001	9999	203	3	xx
3. SOR through DMA +    Algorithmic Trading	400001	9999	203	7	xx

D. Additional Checks for algorithm Trading is mentioned below:-

     All checks defined for normal trading are valid for algorithm trading also.

            i. Order Level Checks

                        Price

                        Quantity / Value

                        Index limit based

                        Open Positions

                        Maximum cumulative pending order quantity / value

                        Exposure Limit

                        Market order should always have the defined market protection applied, that

                        should be lower than the applicable dummy circuit filter of 5% on Index and 10%

on stocks. To further elaborate Market Price protection provides protection to a trader to limit the risk of a market order, within a pre-set percentage of the Last Trade Price (LTP). The member shall be required to maintain and set the market price protection percentage greater than zero and less than or equal to the applicable circuit limits including dummy circuit limits in respect of all algorithmic users

            ii. Client Level Checks

                        Net position v/s available margin checks

                        RBI violation checks such as limits for FII/QFI restricted stocks

                        MWPL violation checks

                        Position and Trading Limit checks

There should be a mechanism in the algo system to handle variation in LTPs/prices beyond a specified limit. It should be possible to specify this limit in member end algo system.

If there is price variation beyond the defined limit, the algo engine should observe cooling period. There should be a provision in member end algo system to specify the time range of cooling period. During cooling period no orders should be generated from the algo.

System level requirements

            Order identification

            Audit Trail

            System security

            No of orders per second

The detailed list of checks for algorithm trading would be made available to the members immediately on their submission of application form.

E. Quantitative values on Economic Disincentives:

A High order to trade ratio is discouraged and shall be penalized. Standardized details of such limits shall be intimated shortly.

Members are requested to contact the following officials:

Sr.	For Clarification/s on	Name of Officials	Telephone
1.	Approval for AT	Ms Bina Khaneria	022-22728348
		Mr.Chirag A. Sodawaterwalla	022-22728156
2.	16th Digit Location ID to be used for AT	Ms Jyoti Thukral	022-22728214
3.	Quantitative values on Economic Disincentives	Mr. Mohit Batra	022-22728179
4.	AT Technical Query	Relationship Manager of respective members	-

This circular over-rides the requirement of submission of Annexure I as informed to members vide earlier circular no. 20090507-15 dated 7/5/2009 and 20090424-15 dated 24/4/2009.

Sanjiv Kapur                              Mohit Batra                              Mitesh Thakkar

General Manager                      Asst.Gen.Manager                    Asst.Gen.Manager

Encl. Annexure 1, 2, 3.