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India joins the modern world: 'Erroneous trades' cause flash crash
NSE Flash Crash Pulls Nifty down by 15.5%
From The Times of India, Mumbai
Saturday, October 6, 2012
http://timesofindia.indiatimes.com/city/delhi/NSE-flash-crash-pulls-Nift...
A flash crash on the National Stock Exchange (NSE) on Friday morning due to erroneous trades by a dealer in 59 frontline stocks pulled the NSE-50 (Nifty) index down 15.5% to 4,888, raising questions about the robustness of the bourse's software and leaving the exchange red-faced on the eve of a visit by the finance minister to the city. It recovered at the end of day's trade to close at 5,747, down 41, while the Sensex closed 120 points down at 18,938.
Although NSE suspended Emkay Global Financial Services, the broking house where the trades had originated, the incident invited severe criticism from market players about why the trading was not automatically stopped by the exchange given the rules of the Securities and Exchange Board of Inida that stipulate a circuit filter should kick in when the index goes up or down 10%. In this case the trading was stopped when the index went down 15.5%, which also triggered stop losses for several investors, thus aggravating losses for no fault of theirs. The flash crash also prompted SEBI to start a preliminary investigation into the whole affair.
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Ravi Varanasi, head of business development for the NSE, was quoted in a statement saying that the circuit filter was triggered at 10% and the cash market was stopped, but the orders that were already in the system were executed in the next few seconds.
Friday's session had started on a positive note with the Nifty up about 30 points. Then between 9.50 and 9.52 a.m., large chunks of several frontline stocks, including RIL, Infosys, ICICI Bank, SBI, TCS, and almost all the 50 Nifty constituents, were sold at prices about 20% lower than the previous closes. This led to a 899-point fall in Nifty within a few minutes, although, as per NSE's September 28 circular, trading should have been halted as soon as it crossed 570 points.
On the Bombay Stock Exchange, trading continued undisrupted and a statement from the exchange, soon after the NSE incident, said that the market at BSE was "working fine and trading members are informed that there are no issues, technical or otherwise, at BSE."
Some marketmen are not buying NSE's views. They questioned that if the cash market was stopped, how was it still possible to execute orders? "Five hundred and 70 points becoming 900 in intra-day trade, which is around 16%, is unacceptable, unexplainable, and cannot be tolerated when the circuit is at 10%," said Arun Kejriwal, director of investment advisory firm KRIS. Pointing at some of the recent system glitches at NSE, in April and May this year, Kejriwal said that such failures show something may be "amiss at the leading bourse." "An enquiry of the highest order must be started by SEBI and the finance ministry immediately," he said.
Market players also questioned NSE's decision to resume trading within 15 minutes after the shutdown by circuit breaker. A June 2001 SEBI circular stipulated that if trading is halted due to a 10% circuit breaker, either up or down, and if such stoppage happens before 1 p.m., the exchanges should give a one-hour gap before resuming trading. If the index again goes up or down and breaks the 15% level, there should be a two-hour halt. And if the change in the index is 20%, the exchanges should be shut for the day.
For example, on May 18, 2009, soon after the Congress-led UPA came back to power with a better majority, the markets were closed within a minute of their start after the two leading indices, Sensex and Nifty, gained 10%. After trading resumed following an hour's gap, the markets were shut for the day when the indices shot past the 15% mark.
There was also confusion among market players when an NSE official told Bloomberg that its circuit filters didn't work due to the speed of decline, while in the official release Varanasi was quoted as saying there was "no question of any glitch or malfunctioning in NSE's systems."
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