Indian exchanges asked the market regulator to narrow the range it allows some stocks to trade, after erroneous orders caused a record plunge in the S&P CNX Nifty (NIFTY) Index, according to officials familiar with the proposal.
Price limits for 216 of the biggest and most liquid stocks should be lowered from 20 per cent to nine per cent, the three officials said. The measure was proposed to the Securities & Exchange Board of India (Sebi) by exchange executives at a meeting in Mumbai on October 6, said the people, who asked not to be identified as the talks were private.
Trading in the benchmark Nifty and some stocks stopped for 15 minutes on October 5 after the 50-stock gauge sank 16 per cent. The incident, which briefly erased $58 billion in value, is the latest in a series of mishaps that has put pressure on regulators globally to prevent market errors. Bad trades sent Kraft Foods Group Inc up as much as 29 per cent on October 3, and in May, the Nasdaq Stock Market blamed software for delays in order confirmations in the debut of Facebook Inc.
“Everyone is very sensitive to these electronic errors,” Adam Mattessich, head of international trading at Cantor Fitzgerald LP, said by phone from New York on October 5. “It’s the kind of thing that could be nothing or it could become a financial calamity.”
Intra-day slump
Of the 4,100 companies on the National Stock Exchange of India, the nation’s largest bourse, 19 slumped 19 per cent or more intra-day. Reliance Industries Ltd, the biggest company by market value, rebounded from a 20 per cent plunge to close up 0.6 per cent at Rs 857.8. The stock dropped 2.5 per cent to Rs 836.2 on Monday. Housing Development Finance Corporation (HDFC), the biggest mortgage lender, also fell as much as 20 per cent on October 5. It rose 0.7 per cent to Rs 755.2 on Monday.
The Nifty slid 0.5 per cent to 5,718.25 at 11:17 am on Monday.
As many as 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd in Mumbai that led to trades valued at Rs 650 crore ($125 million) caused the problem, the NSE said in a statement on October 5.
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 on October 5. “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 index range from 10 per cent to 20 per cent. The exchange and rival BSE Ltd, Asia’s oldest bourse, have price caps on individual stocks that range from five per cent to 20 per cent. Stocks traded in the futures and options segment are permitted to rise or fall 20 per cent in a single session without a halt in trading.
‘Review orders’
“Lowering these limits may prevent flash crashes in the future,” Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance Co in Mumbai, said by telephone yesterday. “Traders will get room to review and modify their orders” after price limits are reached, he said.
Exchange officials are meeting the market regulator on Monday to discuss the implementation of the proposal, the people said. S Raman, executive director at the Sebi, declined to comment on the plan. BSE spokesman Ketan Mehta was not immediately available for comment.
In May 2010, high-frequency orders worsened the US’s so- called flash crash, which briefly wiped $862 billion from the nation’s stocks. While the drop in India drew comparisons with rout in American equities, the US event spurred many times the losses of the Nifty’s drop and affected more stocks.
US crash
About 20 companies in India saw declines of 19 per cent or more on October 5, compared with the more than 300 securities that lost at least 60 per cent during the flash crash before the trades were cancelled, a September 2010 report from the US. Securities and Exchange Commission and Commodity Futures Trading Commission found. The decline and rebound in the Nifty lasted seconds, compared with more than 15 minutes for stocks, futures and indexes in the flash crash.
Narrowing the price cap to the proposed nine per cent may be “too low in light of a relatively fewer free-trading shares,” Seth Freeman, San Francisco-based chief executive officer at EM Capital Management LLC, said by e-mail on Monday. “This, coupled with ETFs and other index based vehicles that hold in common a large number of the same shares, can move the market in either direction. Aggregate shares in a single name traded poorly could drastically move prices beyond nine per cent.”
Free-float shares exclude those held by company founders and strategic partners, and are the basis for Nifty rankings.
Policy reforms
The NSE controls more than 90 per cent of India’s $28 billion equity derivatives market and handles 75 per cent of the stock trades. The stoppage, the biggest such problem in more than two years, comes as a burst of policy reforms by Prime Minister Manmohan Singh propels Indian stocks to a 17-month high. Foreigners have ploughed a net $16.5 billion into local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.
Combined daily volumes on the nation’s two biggest bourses averaged 989 million shares last month, 27 per cent 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,” AS Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte., which manages about $400 million, said by phone from Singapore on October 5.
Emkay in a statement issued October 6 said the “obvious and apparent error would justify the annulment of these trades,” on the NSE. The trades won’t be scrapped as the exchange’s systems weren’t at fault, said Varanasi.
Emkay’s shares plunged by the daily limit of 10 per cent for a second straight day to Rs 28.
