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Tags: india | stock | market | drop

India's Stock-Market Flash Crash Caused by 59 Erroneous Orders

Friday, 05 October 2012 08:17 AM

The National Stock Exchange of India said 59 erroneous orders prompted a plunge in equities that briefly erased about $58 billion in value, underscoring the growing global concern about the integrity of financial markets.

Trading in the S&P CNX Nifty Index and some individual companies stopped at 9:49 a.m. in Mumbai for 15 minutes after the 50-stock gauge tumbled as much as 16 percent. The volume of stocks in the benchmark index that were traded today almost doubled from the 100-day average, according to data compiled by Bloomberg.

Regulators around the world are probing market structures and electronic trading after a series of malfunctions. In May 2010, high-frequency orders worsened the so-called flash crash, which briefly wiped $862 billion from U.S. stocks. The Nasdaq Stock Market in May this year was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading in Facebook Inc., the largest initial public offering of 2012.

“India has joined the big league with this trading disaster,” A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte., which manages about $400 million, said by phone from Singapore. “It’s very surprising so many erroneous orders went through. Exchanges and regulators must be one step ahead as systems and technologies upgrade.”

Price Limits

Orders entered by Emkay Global Financial Services Ltd. for a client that led to trades valued at 6.5 billion rupees ($126 million) caused the problem, NSE spokeswoman Divya Malik Lahiri said by phone from New Delhi.

Circuit breaker limits enforced by the NSE get activated “after existing orders are executed,” Ravi Varanasi, head of business development at the exchange in Mumbai, said by phone. “We are investigating the reason behind the wrong orders and how checks and balances at the member’s end failed.”

The NSE’s trading limits for the Nifty range from 10 percent to 20 percent. The percentages are translated into absolute points of the index movement at the end of every quarter and applied for the next three months. A rise or decline of 570 points, equal to 10 percent of the Nifty’s closing level of 5703.3 on Sept. 28, is meant to halt trading on any day in the quarter through Dec. 31, according to a circular on the NSE’s website.

“Even if there was order backlog, the index couldn’t have slumped 900 points before halting when the circuit filter was set for a 570-point fall,” Arun Kejriwal, director at Kejriwal Research & Investment Services Pvt., said by phone. “This is a system failure. Blaming a broker does not absolve the exchange of the lapse on their system’s part.”

Emkay Plunges

Emkay Global’s Managing Director Prakash Kacholia didn’t answer his mobile phone. The broker’s shares plunged by the 10 percent daily limit to 31.1 rupees.

The Nifty slipped 0.7 percent to 5,746.95 at the 3:30 p.m. close. Reliance Industries Ltd., owner of the world’s largest refining complex, rose 0.6 percent at 857.8 rupees, rebounding from a 20 percent plunge, while Housing Development Finance Corp., the country’s biggest mortgage lender, lost 5 percent to 749.95 rupees after also falling 20 percent.

The NSE, the nation’s largest bourse, controls more than 90 percent of India’s $28 billion equity derivatives market and handles 75 percent of the stock trades. The halt, the biggest such problem in more than two years, comes as a burst of policy reforms by Prime Minister Manmohan Singh has propelled Indian stocks to a 17-month high. Foreign investors have plowed a net $16.3 billion into local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.

Investor Confidence

“The crash definitely hurts as there has been a lot of foreign flows in the last two months and any erroneous order would impact investor confidence,” Daphne Roth, head of Asian equity research at ABN Amro Private Banking in Singapore, which oversees about $207 billion, said by e-mail. “Investors would still ultimately look to future reforms, not just related to the bourse but also to the economy.”

Combined daily volumes on the nation’s two biggest bourses averaged 989 million shares last month, 27 percent more than in August, data compiled by Bloomberg show. Trading last year in the Nifty, at 35.5 billion shares, was the lowest in four years.

“It’s not something that India needed at this stage when volumes are just beginning to recover,” Aquarius’ Rajan said.

In a separate statement, the NSE said it had “disabled” Emkay Global and closed out the broker’s outstanding positions. N. Hariharan, a spokesman at the Securities & Exchange Board of India, the market regulator, was not available for comment.

Competition among Indian bourses is poised to intensify with a third bourse, the MCX Stock Exchange, planning to start trading equities around Diwali, the Hindu festival of lights, which falls in November.

“With another exchange set to be operational in about a month investors would have an alternative,” Kejriwal of Kejriwal Research said.

© Copyright 2021 Bloomberg News. All rights reserved.

The National Stock Exchange of India said 59 erroneous orders prompted a plunge in equities that briefly erased about $58 billion in value, underscoring the growing global concern about the integrity of financial markets. Trading in the S P CNX Nifty Index and some...
Friday, 05 October 2012 08:17 AM
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