Trading disruption

Stock exchanges should be better prepared

The outage at the National Stock Exchange (NSE) on Wednesday highlighted weaknesses in India’s financial trading infrastructure. The NSE now needs to coordinate with the market regulator, the Securities and Exchange Board of India (Sebi), and determine what occurred, preferably through an independent inquiry committee headed by external experts. Those findings, whatever they are, should then be published in a transparent manner and steps should be taken to ensure that incidents of this nature do not occur again, insofar as that is possible. The NSE and Sebi also need to review the information dissemination system to ensure that there is clear and unambiguous communication to investors in cases of any future disruptions.

Apparently, the NSE’s telecom service providers had a technical issue. This meant that one of the largest exchanges in Asia was offline for several hours, starting at 11:40 am. To compensate for the outage, the NSE then reopened and stayed open beyond normal trading hours once the issue was resolved. This was to enable the squaring off of intra-day positions. The BSE, which functioned normally throughout, also stayed open late to facilitate this process. However, the NSE did not clearly communicate to investors and traders that it would reopen and resume the interrupted session. There was confusion and wild rumours were floating around. As a result, traders suffered trauma and losses. Many traders moved to the BSE in order to hedge their open positions on the NSE. They were forced to square off when it seemed as though the NSE would not resume. The fact that this outage happened the day before expiry of the February futures contracts further complicated the process because the transaction volume load was more than average.

The NSE is one of the largest derivatives exchanges in the world, processing a huge volume of equity futures and options contracts on a regular basis. Disaster management and recovery are critical to any sort of business, and they are especially critical for large, technology-driven trading operations like those at the NSE, which processes contracts worth tens of thousands of crores daily. Technically, the exchange is counter-party to every such trade, which means that it also has to undertake the complex task of reconciliation. Under normal circumstances, the NSE has two telecom service providers, so operations can continue seamlessly if any one of the telcos has a problem. However, this incident makes it apparent that there is need for a more effective disaster management infrastructure — a backup option for the backup as it were.

Clear communication under such circumstances is also vital, given that there was a huge volume of open, time-bound financial contracts in the form of derivatives and day trades in the equities segment. A lot of the panic could have been avoided if the traders had been assured that the exchange would reopen, and that it would also make arrangements with the BSE. No doubt the NSE will learn from this incident and so will Sebi. Market disruption can occur for many reasons, ranging from technical glitches to riots, terrorist strikes and bombings as what occurred at Dalal Street in 1993, or in New York in 2001. So this was a relatively minor incident. The exchanges must put systems in place to cope with possible future disruption and also set up better procedures for communicating with traders under uncertain circumstances. The financial community also needs to know what went wrong, and it needs to have credible assurances that any such cases will be handled more quickly and efficiently in future.