Sebi makes testing, audit of software tools must for brokers
To check stock market losses caused by technical glitches, the Securities and Exchange Board of India (Sebi) has made it mandatory for brokers and traders to get their trading systems and software tools tested and audited in consultation with stock exchanges.
The capital markets regulator has also asked stock exchanges to levy "deterrent penalties" in the form of fines or suspension to the concerned stock broker and traders in cases of malfunctioning of software systems used by them.
"Various incidents of malfunctioning of software used by market participants have been observed in Indian as well as foreign securities market in the recent past," Sebi said in a circular on Tuesday.
"Such incidents have emphasised the need for a stringent and thorough testing of software before its introduction in the securities market. This applies equally to any subsequent changes to the software used by the stock brokers/trading members," it said.
The decision has been taken by Sebi pursuant to a consultative process with the stock exchanges, software vendors, system auditors and the regulator's technical advisory committee (TAC) to streamline and strengthen the process of testing of software.
Consequently, all market participants would have to follow a stringent testing procedure before deploying any software system or applications for connecting to the stock exchanges and for the purposes of trading and real-time risk management.
These would include systems like internet-based trading (IBT), direct market access (DMA), securities trading using wireless technology (STWT), smart order routing (SOR) and algorithmic trading (AT).
As per the new guidelines, stock exchanges have been asked to frame appropriate testing policies for functional as well as technical testing of the software. The bourses would also organise mock trading sessions on regular basis, at least once in a month, to facilitate testing of new software or existing software that has undergone any change, in a close-to-real trading environment.
Besides, the brokers and traders would have to engage system auditors to examine reports of these tests to ensure a satisfactory compliance, Sebi said in its circular coming into effect from October 1.
The bourses have been asked to monitor compliance of brokers and traders using algorithm trading and other systems. In cases where broker and traders are found to have failed to participate in mock trading sessions, stock exchange can call for reasons and suspend the proprietary trading rights of the concerned market entity, at least for a day.
The stock exchanges have also been asked to ensure that system auditors examine the compliance of brokers and trading members and provide suitable comments in their system audit report.
If system audit report indicate any failure, the bourses can seek clarification and suspend trading rights of the concerned market entity.