Stocks brokers to face ‘financial disincentives’ for tech glitches in their trading systems

As part of tightening the regulations, Sebi also said that the bourses should disseminate on their websites the instances of technical glitches occurring in the trading systems of stock brokers along with the Root Cause Analysis (RCA) of such issues.

The new framework would be effective from April 1, 2023, the Securities and Exchange Board of India (Sebi) said in a circular.

“Stock exchanges shall put in place a structure of financial disincentives applicable to stock brokers for technical glitches occurring in their trading systems and non-compliance of the provisions made in this regard,” Sebi said.

Against the backdrop of multiple instances of technical glitches in trading systems at the end of the stock brokers, the regulator had constituted a working group to recommend suitable measures to address the issues.

The latest framework has been put in place based on the recommendations of the working group and views obtained from stakeholders and industry experts.

Sebi did not mention about the specific “financial disincentives” that are likely to be faced by the stock brokers for the glitches.

“Rapid technological developments have increased the ease of electronic trading in securities markets. Technology-related interruptions and glitches (technical glitches) and their impact on the investors’ opportunity to trade constitutes major technology-related risk,” Sebi said.

Apart from informing the stock exchanges within one hour of the glitch happening, stock brokers would also have to submit a Preliminary Incident Report to the bourses within T+1 day of the incident (T being the date of the incident).

The report would include the date and time of the incident, the details of the incident, effect of the incident and the immediate action taken to rectify the problem.

Further, the stock brokers would have to submit a RCA report of the technical glitch to the stock exchange, within 14 days from the date of the incident.

Sebi asked the stock brokers to do capacity planning for entire trading infrastructure — server capacities, network availability, and the serving capacity of trading applications.

Also, they would have to monitor peak load in their trading applications, servers and network architecture . The peak load would be determined on the basis of highest peak load observed by the broker during a calendar quarter. The installed capacity would be at least 1.5 times of the observed peak load.

“Stock brokers shall deploy adequate monitoring mechanisms within their networks and systems to get timely alerts on current utilisation of capacity going beyond the permissible limit of 70 per cent of its installed capacity,” Sebi said.

Brokers have also been directed to adopt a framework for carrying out software-related changes or testing in their systems. Further, they would have to establish business continuity or Disaster Recovery Site (DRS) set up.

Noting proactively and independently monitoring technical glitches would be one of the approaches in mitigating the impact of such glitches, Sebi said, adding that the exchanges would build API-based Logging and Monitoring Mechanism to be operated between stock exchanges and specified stock brokers’ trading systems.

Under this mechanism, specified stock brokers would monitor key systems and functional parameters to ensure that their trading systems function in a smooth manner. Stock exchanges through the API gateway would independently monitor these key parameters to gauge the health of the trading systems of the specified broker.

In July 2021, Sebi put in place a detailed Standard Operating Procedure (SOP) for Market Infrastructure Institutions (MIIs).

As a part of the SOP, stock exchanges and other market infrastructure institutions as well as their top officials are liable to face penalties for lapses in handling and recitfying technical glitches.