Algo error and the government's soft underbelly

In the same way that the infrastructure to monitor algo trades is missing, the infrastructure to absorb big money in the economy is missing

A Rs 650-crore sell order executed by Emkay Global Financial Services resulted in a free-fall on the National Stock Exchange which had to be closed for a few minutes as its intra-day circuit filter limit had been breached. It took the market over four months to move from 4,800 levels to 5,800 levels but only 30 seconds to reverse that, at least for a moment. Ironically the trade comes at a time when international investors are keenly watching the Indian markets after a series of policy announcements made by the government.

As it was, a series of 59 erroneous orders which caused the circuit filter to be triggered, it is clear that it was an algorithm-based order. This event would bring back the call to ban program trading in the markets. This is not the first time such an event has happened. Algorithm trades as well as fat finger trades have been blamed for sharp and sudden price movements in the market earlier too.

What today’s trades highlight is the lack of infrastructure to monitor these trades. Our exchanges do not have a mechanism to monitor these trades which are executed at very high speed leading to the last line of defence being hit before the error is recognised.

This case has a lot in common to the reforms process introduced by the government. The series of measures announced by the government are largely meant to attract foreign funds in the country. FDI has been opened up in various sectors to attract foreign money.

However, as is the case with the markets, the infrastructure to absorb the big money is missing. Take the case of the increase in FDI in airlines. The very structure in which Indian companies operate in the country is leading to losses for almost all the players but one low cost operator. Very few players would be interested in investing in this business in order to make losses. The only reason they might be interested in the sector would be in outbound travel that is taking passengers from India to other countries.

In the case of FDI in retail, the terms set by the government to attract companies are unlikely to see companies rushing in. Even in single brand retail there are few players as they find the conditions not conducive for investments. Further, the claims and assumptions by the government for opening up the sector is proving to be wrong as demonstrated by the wastage figures which are way above what the trade is saying. Farmers have yet to see any benefit from the Indian retailers who have been working with them for a long time now.

Large Indian retailers are still struggling to make consistent profits and are struggling with their business models. Further, various laws like the Agriculture Produce Market Committee (APMC) Act will need to be changed for smooth movement of goods between states.

FDI in insurance has been welcomed by the players who have an international partner. A few of these companies are in the country for nearly a decade but most are yet to be profitable. The only reason they welcome it is they will be able to survive for a few more years.

In pension, the government has played to the international gallery by allowing global players in the country who will have little to offer. Unlike an insurance company which will at least be setting up a marketing and after-sales set-up, precious little will be done by the pension fund managers.

Despite the series of reform measures announced, none of the rating agencies or bigger broking houses have increased the GDP growth forecast for the year. Thus, these reforms are unlikely to solve any of the underlying problems in the short term. The only bit of announcement that will immediately impact the financials of government positively and consumers negatively are the hikes in fuel prices.
Unless the government invests in infrastructure development, opening up of FDI will only result in disgruntled investors who are unable to exit without a high cost, just like the investor who had given the sell order to Emkay Global Financial Services.