Comparative analysis of SECP (Pakistan) vs SEBI (India) vs SEC/FINRA (USA) regulatory frameworks
2025 (Proposed)
Current
Current
Requires prior intimation and registration of algorithms with the exchange before deployment. Brokers must notify the exchange and obtain permission for any algorithmic trading system. Third-party algorithm developers also need to be registered/approved.
SEBI mandates that stock brokers can offer algorithmic trading only after obtaining prior permission from the exchange. Each new algorithm (or any material change) must be submitted for exchange approval and conformance testing before going live.
No pre-approval of algos by regulators/exchanges. Instead, the U.S. focuses on registration of persons and firms rather than the algorithms themselves. Firms engaging in algorithmic trading must be registered broker-dealers.
Algorithms must pass initial testing (in a simulated environment) before live use, and undergo periodic retests including under stress scenarios. The exchange is to oversee conformance testing of broker systems.
Before activation, algos go through exchange-run conformance tests under various conditions. SEBI also requires brokers to subject their algorithmic trading systems to a system audit every six months by certified auditors.
U.S. regulations rely on firms to ensure extensive pre-deployment testing and validation of algorithms. FINRA guidance emphasizes that testing of algos before production is an essential component of supervisory duty.
The SECP proposal explicitly forbids any form of market manipulation via algorithms – e.g. fake orders, layering/spoofing, quote stuffing. Brokers must ensure their algos do not compromise market integrity.
SEBI's rules require exchanges to implement surveillance and controls targeting algorithmic abuse. Exchanges must impose 'economic disincentives' for high order-to-trade ratios to deter excessive order cancellations.
In the U.S., no algorithm may be used to violate securities laws – rules against fraud or market manipulation fully apply to algos. FINRA specifically prohibits practices like entering non-bona fide orders.
The SECP proposal recognizes third-party algorithm providers and subjects them to oversight. Any third-party algo system used by a broker must adhere to the same regulatory standards.
SEBI does not exempt outsourced or vendor algorithms from its framework – they require the broker to obtain exchange approval and ensure compliance regardless of who developed the code.
U.S. regulators treat third-party algo tools as an extension of the broker's obligations. Brokers must supervise all outsourced systems just as if developed in-house.
SECP's framework calls for testing algorithms under extreme market conditions to ensure they remain stable. Simulated stress scenarios must be part of the initial and periodic testing regimen.
While not labeled 'stress tests' explicitly, SEBI's rules demand that exchanges and brokers account for worst-case conditions. Exchanges must ensure their trading systems can handle the load from algorithmic orders.
U.S. regulatory guidance strongly encourages firms to test algorithms under adverse market scenarios. FINRA advises that testing protocols consider adverse or fast market conditions.
SECP proposes that brokers implement a kill switch mechanism to immediately halt an algorithm's trading in case of malfunction or aberrant behavior. Brokers must be able to instantly cancel outstanding algo orders.
SEBI explicitly requires safeguards to shut down algorithms quickly if they behave erratically. Brokers' systems should automatically detect a 'runaway' or looped algo and stop it.
U.S. rules do not specifically use the term 'kill switch,' but the concept is embedded in risk management expectations. The SEC's Market Access Rule requires brokers to have the ability to immediately block or cancel orders.
SECP's proposal calls for brokers to establish strong internal governance frameworks for algorithmic trading. Firms must designate senior management responsible for oversight of all algo trading activities.
SEBI's framework entails oversight by management through required audits and compliance processes. Brokers had to create internal approval processes for algos with risk/compliance officers vetting strategies.
U.S. regulators require that algorithmic trading be subject to the firm's general supervision hierarchy. FINRA's guidance outlined best practices for governance, including maintaining an inventory of algorithms.