Part 1: Summary of SECP's Key Proposals

The SECP aims to establish a comprehensive regulatory framework for Algorithmic Trading in Pakistan's capital market. The core objectives are to harness the benefits of technology (like increased liquidity and efficiency) while mitigating the associated risks (like market manipulation and systemic instability).

Here are the main points of their proposed framework:

1. Phased and Restricted Introduction:

   • To begin with, algorithmic trading will be permitted for institutional investors only. This is a cautious, phased approach to manage risk before considering a wider rollout to retail investors.

2. Mandatory Registration and Approval:

   • All entities wishing to use algorithmic trading, including Securities Brokers, algorithm developers, and third-party vendors, must register with and get prior approval from the Exchange (PSX).
   • Each individual algorithm must be registered and assigned a unique identification code for tracking and audit purposes.

3. Rigorous Testing and Certification:

   • Initial Conformance Test: Before going live, all algorithms must be tested in the Exchange's User Acceptance Testing (UAT) environment to ensure they function correctly.
   • Stress Testing: Brokers must conduct stress tests to see how algorithms perform under extreme conditions (e.g., high volatility, large order volumes, connectivity failures).
   • Periodic Testing: Ongoing testing will be required to ensure continued compliance.

4. Strict Risk Management and Controls (Broker's Responsibility):

   • Pre-Trade Controls: Brokers must implement automated checks for price limits, order value, order volume, and message frequency ("burst control") to prevent erroneous orders.
   • Kill Switch Functionality: It will be mandatory for brokers to have a "kill switch" to immediately halt all algorithmic trading activity from their end if a malfunction occurs.
   • Post-Trade Controls: Brokers must conduct real-time monitoring, regular system health checks, and independent audits of their trading systems.

5. Market Integrity and Fair-Play Rules:

   • Order-to-Trade Ratio (OTR): Limits will be placed on the ratio of orders submitted versus trades executed to penalize manipulative strategies like "quote stuffing".
   • Trading Time Restrictions: Algorithmic trading may be disallowed during sensitive periods like the pre-open session to ensure fair price discovery.
   • Prohibited Activities: The framework explicitly prohibits market abuse, spoofing, layering, and any strategy that disrupts market orderliness or bypasses regulatory controls.

6. Governance, Oversight, and Accountability:

   • Senior Management Responsibility: Brokerage firms must designate senior management to be responsible for the oversight of all algorithmic trading activities.
   • System Audits: Regular, independent system audits by certified auditors will be mandatory.
   • Service Level Agreements (SLAs): The framework calls for clear SLAs between the Exchange and brokers, brokers and clients, and brokers and third-party vendors to define responsibilities and liabilities.

Part 2: Feedback and Comments on the Concept Paper

Below are comments structured in the format requested by the SECP on page 14 of the document. This feedback is provided from the perspective of a stakeholder, such as a securities brokerage firm.

Name: [Your Name/Firm's Name] Name of the related Entity: [Your Brokerage Firm/Association Name]

Confidentiality: Comments may be made public, but contact information should remain confidential.