India’s capital market regulator, the Securities and Exchange Board of India (Sebi) has laid out new rules for the use of advanced automated software in trading in order to avoid risks caused by algorithmic trading carried out by the brokers.

The regulator said in a new notification that it will lay down broad guidelines for algorithmic trading in the securities market as per the recommendations of technical advisory committee (TAC) and secondary market advisory committee (SMAC).

Sebi noted that the use of technology for trading in financial instruments have increases substantially over the last few years. Several stock brokers and their clients are increasing using algorithmic trading. Under algorithmic trading, orders on the stock exchanges are generated using high-frequency, automated execution logic.

The Sebi recommended that the stock exchanges should make sure that all the algorithmic orders, software driven automated order execution engines muse be thorough the servers of the brokers situated in India and who have appropriate mechanism to avoid risks.

"The minimum order-level risk controls should include a price and quantity limit check. The price quoted by the order shall not violate the price bands defined by the exchange for the security," Sebi said.

It also said that stock exchanges must have the ability to shut down broker’s server when required.