Testing, audit of software tools must for brokers: SEBI

The stock exchanges have been asked to frame appropriate testing policies for functional and technical testing of the software

August 21, 2013 3:44 IST | India Infoline News Service
In order to check stock market losses caused due to technical errors, SEBI (Securities and Exchange Board of India) has made it mandatory for the brokers and traders to get their trading systems and software tools tested and audited in consultation with the stock exchanges.

The market 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 on Tuesday.

Thus, 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).

According to 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 exchanges 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.

In addition, 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.

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