Concern over margin money triggered crash

According to market participants, on a day when there was absolutely no buying interest, this sale by the exchange led to the free fall in stock prices.

Brokers did not entertain fresh buy orders from those clients who did not have surplus funds lying in their trading accounts.

"The market slide since Thursday had led to broking houses reaching the brink of their margin levels and they were unwilling to take any more exposure," a broker told Business Standard on conditions of anonymity.

Under normal circumstances, clients place buy orders and make cheque payments or effect electronic clearing of funds from their bank accounts. "As these funds get transferred to the broker's account only the following day, brokers were unable to execute buy transactions without further exposing their margin limits," the source added.

At the same time, margin requirements were strictly monitored by the exchange and any shortfall was met with immediate disconnection of terminals and selling the stocks in the brokers' account in the open market.

"The exchange has been doing this for the past three trading sessions. What made Monday's market fall so sharp was the fact that no one was in a position to buy these shares," a broker said.

Despite several attempts, no official at the exchange was available for comment. An e-mail enquiry received no response.

This lopsided demand-supply story led to fuelling of rumours in the market that a payment crisis was brewing, leading to panic in the morning.

In fact, the terminals of three broking houses, two of which have large retail presence, were said to have been switched off by the exchange. None of the executives of these broking houses were willing to comment officially.

Brokers also pointed out that even though payments have been made to meet their margin requirements, the inter-linkages between the bank, the clearing house and the exchanges led to delays in crediting their accounts led to confusion.

"Some brokers' terminals were reconnected in less than 10 minutes, but the damage was done as rumours and speculations cloaked the markets," a market source said.

An NSE statement today said: "There have been some rumours with regard to the smooth settlement of funds and securities at the National Stock Exchange. It is clarified that the settlement for both the equity and derivatives markets were completed smoothly and successfully."

A section of the broking community said it has been suggested to the exchanges that in crunch situations an alternate solution of allowing brokers to offset their transactions with each other could be set in place.

"While the exchange can put in checks and measures to ensure that potential flare-ups of margin positions do not happen, this decentralised system will help in exceptional times like today where trading is highly volatile," a broker said.

However, another broker defended the exchange's action saying the move was justified as it aimed at protecting the market.