Circular No: ACE/TECH-002/2013/023 Date: March 28, 2013 Guidelines on Algorithmic Trading In terms of the provisions of the Rules, Bye-Laws and Business Rules of the Exchange and in continuance of Circular nos. ACE/TECH-001/2011/015 dated February 14, 2011 and ACE/TECH-006/2011/108 dated November 4, 2011, the members of the Exchange are notified as under: Pursuant to the issuance of Broad Guidelines on Algorithmic Trading by Forward Market Commission (FMC) vide FMC circular No 7/9/2011-MKT-I dated January 31, 2013, Members are hereby directed to provide for following risk management features/ controls in their Algo systems for carrying out Algorithmic Trading 1. Algorithmic trading shall mean any order that is generated using automated execution logic (hereinafter referred to as "Algo "). 2. Members should ensure that all the checks and controls mentioned in the FMC guidelines are incorporated in the Algo systems including the following (a) The Algo orders shall be routed through member servers located in India and through specified CTCL ID/ATS User ID approved by the Exchange for Algo trading. Member shall not place any Algo order from any other User ID. These IDs shall have no interlinks with any system or ID located/linked outside India (b) Orders of their clients are routed through member servers only and client orders are not placed directly to the Exchange trading system (c) Immediate Or Cancel (IOC) orders and Market orders shall not be placed using Algo systems. Only Limit Orders will be allowed to be placed using Algo systems (d) The strategies which are approved by the exchange for placing the Algo orders
are only used and Members should not send any Algo orders which are not conducive to efficient price discovery or fair play (e) Members shall use Algorithmic trading only after obtaining prior written permission of the Exchange. Prior written permission of the Exchange should also be obtained for any modification or change to the approved Algo systems or strategies. The modified Algo systems or strategies should also meet the requirements specified in these guidelines. 3. Members shall set up and apply the necessary risk control checks at the individual order level and client level before each order generated by the Algo system is released to the Exchange Trading system and implement the following minimum levels of checks: i. Daily Price Limit Check: Orders are not released in violation of the daily price limit defined in the contract specification or any other limit which may be prescribed by the Exchange. ii. Maximum Order Size Check: Orders are not released in violation of the maximum order size limit defined in the contract specification. iii. Position Limit check: The net position of the client / member is not in violation of the position limits prescribed in the respective commodity contract specification/laid down by the Commission. iv. Automated Execution Check: Algo should account for all executed, unexecuted, and unconfirmed orders placed by the system before releasing further orders. Algo system shall have pre - defined parameters for an automatic stoppage in the event of Algo execution leading to a loop or a runaway situation. v. All Algorithmic orders released to the Exchange trading system shall be tagged with the unique identifier as specified by the Exchange from time to
time. Members shall keep all data/trigger points to establish the audit trail. 4. In order to ensure orderly trading in the market and fair usage of the trading platform by all members, the following economic disincentives for daily algo order-to-trade ratio have been put in place: Daily Order-Trade Ratio (Member wise) Upto 50 Charges (per Order) NIL 50 to less than 250 (on incremental basis) 1 paise 250 to less than 500 (on incremental basis) 5 paise 500 or more than 500(on incremental basis)* 5 paise *In case the ratio is 500 or more than 500 during a trading day, the concerned member shall not be permitted to place any order for the first 15 minutes on the next trading day (in the continuous trading session) as a cooling off action. However, the trading member shall be permitted to enter transactions in risk reducing mode (squaring off) during such a cooling off period. For the purpose of calculation of daily Order-to- Trade ratio, all algorithmic orders, i.e., order entry, order modifications and order cancellations shall be considered 5. The Algo system should have features to restrict the number of Algo orders from a particular CTCL ID/ATS User ID not exceeding 20 orders per second. For number of Algo orders exceeding 20 per second, there will be Economic disincentives, which will be notified separately. 6. The member shall have system to identify dysfunctional Algos (i.e., leading to loop or runaway situation) and take measures to impede any possible instance of ordering flooding by Algo systems 7. The member shall maintain sufficient deposits/funds and ensure that the trades effected through algo facility, whether on own account or client s account do not result in shortages in margin deposit or settlement obligation.
8. Members should ensure that their trades routed through Algo shall not be in nature of abnormal / manipulative trades and should facilitate orderly trading and integrity of the markets. The Algorithmic strategies used by the Members should not be dysfunctional, taking liquidity and not detrimental towards efficient price discovery or fair play. The user IDs not complying with the same will result in disablement of such user ID / member s terminal 9. Members shall put in place real time monitoring systems to identify algorithms that may not behave as expected. Members shall bring any such incident to the notice of the Exchange immediately. 10. Members shall ensure that Algorithms are safeguarded from misuse or unauthorized access. 11. Members shall maintain logs of all trading activities, record of control parameters, orders, trades and data points emanating from trades executed through algorithm trading and should make them available to the Exchange whenever required for the purpose of audit / inspection 12. The Exchange may seek details of Algo strategies to be used by the members for the purpose of inquiry, surveillance, investigation, etc. 13. The Annual Compliance Report (ACR) as submitted by the Members shall include a specific system audit report of the Algo trading system ensuring that the checks are in place. Such system audit shall be conducted by Certified Information System Auditors (CISA) empanelled by the Exchange. Further, the Exchange may conduct system audits, as required. 14. Members already using the Algorithmic trading shall obtain re-approval from the Exchange after successful demonstration of their Algo software to the Exchange. The re-approval shall be obtained before 31 st March 2013, failing which the Algorithmic trading facility will be deemed to be withdrawn
15. In addition to above requirements, the Members shall be required to execute, sign agreements or undertakings as may be prescribed by the Exchange / FMC from time to time 16. The Exchange reserves the right to withdraw or modify the Algo trading facility in respect of all or any commodity, generally or specifically for any Member. Further the Exchange reserves the right to disable Members terminal who are not complying with the Algo guidelines 17. The documents that are to be provided to the Exchange while applying for Algorithmic Trading are given as Annexure. The documents so stated in the annexure are available on the Exchange website under the Technology section. All members are advised to note the above guidelines and ensure compliance. Any noncompliance / non-adherence thereto will subject the member to appropriate disciplinary measures including levy of penalty. The guidelines shall be effective from April 1, 2013. The members already using Algorithmic Trading shall require the approval of the Exchange as per the revised guidelines by March 31, 2013. Members may please note that all the earlier circulars on Automated Trading System (ATS) stand modified to the extent of provisions stated in this circular. For and on behalf of Ace Derivatives & Commodity Exchange Ltd. Ashish Naik Head - IT For any clarifications or assistance, please contact the Customer Service Group at 022-6670 9201 or send us an email at services@aceindia.com
Annexure Application by Member for Algorithm Trading Facility I. Member desiring to use Algorithms from Exchange-Approved Vendor: Sr. Document No. 1. Application form for identification of Algorithms trading as Approved Algorithms 2. Strategy Documentation 3. ATS Member Undertaking 4. Software Acceptance Form 5. Software Procurement Confirmation Form 6. Board Resolution II. Member desirous of using In-House Algorithms: Sr. Document No. 1. Application form for identification of Algorithms trading as Approved Algorithms 2. Strategy Documentation 3. ATS Member Undertaking 4. Board Resolution Note: The formats of aforesaid documents are available on the website of the Exchange i.e. www.aceindia.com under Technology Section.