The Telegraph
Saturday , October 6 , 2012
Since 1st March, 1999
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Freak trade spoils mood

Mumbai, Oct. 5: A huge 900-point “flash crash” in the Nifty this morning because of erroneous orders by a brokerage caused panic in the market, prompting Sebi to begin a probe into the incident which briefly erased about Rs 10 lakh crore worth market wealth.

The incident occurred on a day hopes were high of a rally on bourses, following some big-ticket reforms approved by the government last evening, including FDI in insurance and pension.

The Nifty crash soured the mood on the Bombay Stock Exchange as well, with the Sensex falling 120 points to close at 18938.46. The Nifty closed at 5746.95, down 40.65 points. Besides, investor mood on insurance and pension reforms got dampened over fears of the concerned bills facing stiff opposition in Parliament.

Though the huge crash lasted for a brief while, it brought into focus how human error or sophisticated techniques adopted by one entity could hurt other investors.

The crash has also raised the question of whether the current system put in place by bourses was effective enough to ensure market stability.

The Nifty opened at 5815, higher than the last close, as investors continued to cheer the reform measures announced by the government on the pension and insurance fronts.

However, trading turned dramatic when the index hit a low of 4888.20, a drop of 926.8 points, or 15.52 per cent. As the index fell more than 10 per cent, the circuit filter trigger went off and the cash market was closed automatically.

Circuit filters are price bands imposed on stocks and indices; when a stock or an index breaches a stipulated band, trading is suspended.

The NSE in a statement said that the Nifty fall was “apparently’’ on account of the entry of 59 erroneous orders, which resulted in multiple trades of an aggregate value of over Rs 650 crore.

These orders were entered by Emkay Global Financial Services on behalf of an institutional client. According to the exchange, these market orders were entered for an erroneous quantity which resulted in trades at multiple price points across the entire order book, causing the circuit filter to go off.

Trading started again at 10:05am, and the market functioned normally thereafter.

“Emkay Global Financial Services was asked to close out (honour) its positions arising out of erroneous trades, which they have done. The exchange then disabled the member from trading. There is no question of any glitch or malfunctioning in NSE’s systems. The broker’s dealer put in an erroneous quantity in the orders, which is being investigated.’’ Ravi Varanasi, head-business development at the NSE, said.

Varanasi added that even as the circuit filter was triggered at 10 per cent and the cash market was stopped, the orders that were already in the system were executed in the next few seconds.

Market circles said the large sale orders erroneously entered by the brokerage was for a basket of Nifty stocks.

“Since the huge sell order led to a decline in share prices, it also triggered stop losses for other investors, thus leading to a huge fall in the Nifty,’’ a broker said.

While there are conflicting views on whether the “erroneous’’ orders were due to human error or algo trading (which uses advanced mathematical models for making transaction decisions), experts are also asking if the systems at NSE were effective enough.

“The NSE system has failed. Every quarter, the exchange issues circular circuit filter limits. For this quarter, the circuit filter limit is 570 points. How did the market fall 900 points when the circuit filter is at 570 points. This needs thorough investigation and the NSE must take care to ensure that this will never happen again,’’ Arun Kejriwal, director of KRIS, told The Telegraph.

Sebi probe

Sebi is looking into all aspects of the incident, including the probability of technical problems or any intentional manipulative activities by some vested interests, a senior regulatory official said.

The regulator would look into the entire trading pattern of Emkay Global, which has been disabled by the NSE from trading for now, as also the trade details of the affected stocks, the official added.