Sebi announces steps to prevent flash crashes

To prevent flash crashes like the one on the National Stock Exchange (NSE) in October, the Securities and Exchange Board of India (Sebi) has announced guidelines that prescribe multi-level checks before a big order is placed, besides dummy filters for stocks that can be traded in the futures & options (F&O) segment. Sebi suggests there should be checks on the quantity ordered and the margin available with the exchange, indicating brokers’ exposure limits.

Sebi has asked bourses to implement a set of measures in phases to ensure the Indian stock exchanges deploy the latest technology while maintaining adequate controls. These would be applied to orders placed on stocks, exchange-traded funds (ETFs), index futures and stock futures.

The bourses would have to implement these measures in a month, with a prior one-week notice on their websites.

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Key provisions of Sebi guidelines

• Restrictions of Rs 10 crore on sale or purchase of shares
• Brokers to be put under risk-reduction when they positions exceed 90% of margins available with an exchange
• 10% dummy filters for stocks in the F&O segment; price variation of more than 10% not be accepted at one go

The regulator adds that bourses would have to ensure appropriate checks that value and/or quantity are implemented by stock brokers on the basis of the risk profiles of their clients.

In the first week of October, an error in an order placed by Emkay Global Financial had sent NSE’s benchmark Nifty crashing 900 points down. Even before that, there had been instances of flash crashes due to punching errors.

According to the new norms, the first check would be on the value of the order. Any single order for sale or purchase of shares above Rs 10 crore would not be accepted in normal market. In Emkay’s case, the dealer had entered the value of the order as the quantity of Nifty-50 basket. When Sebi’s new norms kick in, such errors would be easily detected.

The next check would be on the margin available with an exchange. As soon as a broker’s total position exceeds ninety per cent of his margin-collateral available with an exchange, unexecuted trades would be cancelled and he would be put in the risk-reduction mode until additional margins are made available. The Sebi circular says when a broker is put in this mode, only those orders that have ‘immediate’ or ‘cancel’ attribute would be permitted. Normally such orders are placed under algo trading.

Exchanges have been asked to check all new orders for sufficiency of margins in this mode.