Securities and Exchange Board of India - SEBI has made it mandatory for users to have their systems audited every six months and increased penalties on errant stock brokers. 

In a circular issued yesterday, SEBI has decided to tighten the norms for algorithmic trading following the recommendations by Technical Advisory Committee and the new norms will come into effect from May 27. 

As per the amended guidelines, stock brokers and traders offering algo facility would need to subject their algorithmic trading system to audit every six months so as to ensure compliance with the requirements prescribed by SEBI and the stock exchanges. Such audits would need to be undertaken by a system auditor with relevant certifications. 

SEBI has also allowed the stock exchanges to impose suitable penalties in case of failure of the stock broker or trading member to take satisfactory corrective action within a time-period specified by the bourses. 

Algorithmic trading utilizes very advanced mathematical models for making transaction decisions in the financial markets. Algorithmic trading is most commonly used by large institutional investors due to the large amount of shares they purchase everyday. 

Complex algorithms allow these investors to obtain the best possible price without significantly affecting the stock's price and increasing purchasing costs.