NSE explores new ‘unsupervised’ technology to detect anomalies in Algo commands

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Considering a major technological leap, the National Stock Exchange (NSE) is exploring an “unsupervised machine learning model” to fix anomalies in algorithmic orders. Machine learning or algo algorithms monitor trading results and detect patterns that determine whether stock prices go up or down.

In its annual report for 2021-22, the exchange said it has developed well-organized market surveillance mechanisms backed by a robust technology architecture over the years. The exchange’s monitoring systems identify fraudulent practices and ensure prompt management of identified violations.

In order to upgrade and strengthen its surveillance-related capabilities, the exchange rolled out key initiatives in 2021-22, including the deployment of alerts to detect market abuse practices in options contracts on OTM (over-the market) actions, capture multiple leg reversal events as well as market abuse practices where option contracts are traded at outside prices with no change in the underlying.

Additionally, “Exchange is exploring an ‘unsupervised machine learning model’ to detect anomalies in algo commands,” the annual report notes.

Algorithmic trading or “algo” in market parlance refers to orders generated at lightning-fast speed through the use of advanced mathematical models that involve automated trade execution, and it is primarily used by large investors. institutional.

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Additionally, the exchange aims to modernize its trading platform to “build highly scalable, resilient and fault-tolerant trading application components to process 1 million orders/sec.”

Apart from the technological advancement measures, the exchange paid Rs. 25 lakh to SEBI “without admitting any default on the part of NSE” in the case relating to a technical issue that arose in February last year. This case is pending before the capital markets regulator for further proceedings and discussions.

On February 24, 2021, NSE suffered a four-hour shutdown of its trading system due to a technical issue. The exchange’s trading system was halted due to some issues in the ties with telecommunications service providers which, in turn, impacted the company’s storage area network (SAN) system, which made the main SAN inaccessible to host servers.

This also resulted in the unavailability of the NSE Clearing Limited (NCL) risk management system and other systems such as clearing and settlement, indexing and monitoring systems.

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“SEBI voids its letter dated July 2, 2021, ordering NSE and NCL to pay a financial deterrent of Rs 25 lakhs each. The said amount was paid by NSE on July 12, 2021 and NCL on July 14, 2021,” the annual report c is noted.

In addition, the exchange stated that it followed the Standard Operating Procedure (SOP) as communicated in SEBI correspondence and the SOP communicated to all Market Infrastructure Institutions (MIIs) – exchanges, clearing houses and Custodians – to report technical issues by ITNs and the imposition of financial disincentives.

Apart from this, few other issues relating to the exchange are also pending before the Securities and Exchange Board of India (SEBI).

In April 2019, the regulator returned the consent request filed by NSE and issued orders regarding the three show cause notices regarding the exchange’s colocation facility, dark fiber and governance and the conflict of interest issue. .

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As part of the first order, SEBI had passed an instruction on NSE to return Rs 625 crore, together with interest, which has since been remitted by the exchange to an interest-bearing account, and certain restrictive instructions.

In the second order, he had requested to deposit Rs 62.58 crore, together with interest, which was remitted by NSE to an interest holder and in the third order, he had placed certain non-monetary and corrective instructions on NSE .

NSE appealed all three orders to the Securities Appellate Tribunal (SAT). These appeals are pending a final hearing, with the exception of the roommate case, which was heard by the SAT and is reserved for orders. In addition, NSE also received notices of award covering the three orders.

“SEBI in the House of Commons Arbitration case passed an instruction imposing a fine of Rs 1 crore, the said order was challenged by NSE before SAT and the SAT stayed the said instruction. The second and third issues are in proceeding before SEBI,” the report noted.


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