Sebi makes testing, audit of software tools must for brokers

Aug 20 2013, 18:19 IST
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As per the new guidelines, the stock exchanges have been asked to frame appropriate testing policies. As per the new guidelines, the stock exchanges have been asked to frame appropriate testing policies.
SummaryAs per the new guidelines, the stock exchanges have been asked to frame appropriate testing policies.

To check stock market losses caused by technical glitches, Sebi today made it mandatory for the brokers and trades to get their trading systems and software tools tested and audited in consultation with bourses.

The capital markets regulator has also asked the stock exchanges to levy "deterrent penalties" in the form of fines or suspension to the concerned stock broker and traders in cases of any 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.

"Such incidents have emphasized 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," Sebi said in a circular.

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, the 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 exchanges 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 bourses have also been asked to ensure that system auditors examine the compliance of brokers and trading members

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