Definition
Kill Switch (Trading)
A kill switch is a control that lets a trading firm or exchange instantly halt a member's order flow and cancel resting orders, used to stop a malfunctioning algorithm or contain a runaway risk event.
Indian exchanges require brokers running algos to have kill-switch capability so that a misbehaving strategy can be shut off and its open orders pulled within seconds. The exchange itself can also disable a member's connectivity if risk limits are breached.
The kill switch is a cornerstone of the SEBI algo approval and risk-management regime, designed to prevent incidents like erroneous order avalanches from cascading into a market disruption. Effective kill switches operate at multiple levels: per strategy, per dealer and at the overall member connection.
Related terms
- Algorithmic TradingAlgorithmic trading is the use of computer programs that follow pre-defined rules on price, timing, quantity and other variables to place and manage orders automatically, with little or no human intervention per order.
- Order-to-Trade Ratio (OTR)The order-to-trade ratio measures the number of orders (including modifications and cancellations) a participant submits relative to the number of actual trades executed, used to police excessive messaging.
- SEBI Algo ApprovalSEBI algo approval refers to the regulatory framework under which algorithmic trading strategies must be vetted and authorised by the exchange before deployment, with unique identification and audit trails.
- Pre-Trade Risk ControlsPre-trade risk controls are automated checks applied to orders before they reach the exchange, such as price bands, quantity limits and exposure checks, to prevent erroneous or excessive trades.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.