It happened in a flash: At 9.49 am, the S&P Nifty, the benchmark index of NSE, plunged 900 points, or 16 per cent, within two minutes. The crash, which wiped out over Rs 3 lakh crore ($58 billion), was caused by a mere Rs 650-crore sell order by Emkay Global Financial Services.
The single order, placed in 59 trades, including blue chips like State Bank of India, ITC and others at a significantly lower price, pulled down the index from 5,773 to 4,888. Nifty finally closed at 5,747. This happened as the brokerage wanting to place a basket sell order for Rs 65 crore for an institutional client punched in an order worth Rs 650 crore by error.
Even as Sebi and NSE have initiated a probe, experts have raised doubts over the risk management system, and the shallow depth of the Indian stock market was exposed.
| RECENT FLASH CRASHES |
| IN INDIA |
| Jun 1, 2010: Reliance stock fell 20% and also pulled down the Sensex by 600 points to a punching error |
| Oct 26, 2011: BSE had to annul all trades on ‘muhurat day’ in 2011 due to extraordinary volumes |
| Apr 20, 2012: Nifty futures dropped over 300 points after stop losses got triggered. The same day shares of Infosys also witnessed a momentary drop of 20% |
| Oct 5, 2012: Erroneous orders worth over Rs 650 cr by Emkay triggered a 900 points drop on the Nifty |
| IN THE US |
| May 6, 2010: Dow Jones index saw a flash crash of 1,000 points |
| Aug 1, 2012: US-based Knight suffered a loss of $440 million after its rogue algorithm caused major disruptions in shares prices of 148 companies on the NYSE. |
| Part of penalty burden to be borne by insurer |
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What was surprising was that the incident did not involve any high-frequency or algorithmic trading on the part of Emkay, unlike some stock-specific crashes like in the case of Infosys in the past.
NSE Senior VP Ravi Varanasi said: “There was no technical glitch. It was a normal market order.” He clarified a large order was placed erroneously and trading was not halted for a longer duration, as required under the norms, because the entire market could not be made to suffer.
Rules say trading should be halted for an hour if there is a fall of 10 per cent in the Nifty or Sensex before 1.00 pm and for 30 minutes if the limit is breached between 1 pm and 2:30 pm. These norms are similar if indices rise/fall by 15 per cent and 20 per cent. on Friday, after the crash (9:49 am-9:51 am), NSE halted trade for less than 15 minutes, before resuming at 10:04 am.
Brokers said NSE might be right in not halting trade for longer, as disturbing normal market trading due to an erroneous trade could have caused more damage. NSE controls 90 per cent of India’s (average daily) equity derivatives market, worth Rs 1.5 lakh crore ($28 billion).
Emkay’s sell order took place in the cash market, which has an average daily volume of around Rs 15,000 crore. Of this, delivery-based trading could be much less, at 50 per cent. This absence of depth is being cited as the main reason for the crash.
Though the brokerage did not give any statement, BSE and NSE sources said the part-payment of the erroneous trading cost was made by evening.
Market experts estimate the loss to the company at around Rs 70 crore – almost 50 per cent of its net worth as of March 2012 – on account of loss of value on shares sold and the penalty due to such transactions. Emkay’s share price plunged 10 per cent to hit the lower circuit and remained there all day to close at Rs 31.10 (market cap Rs 75 crore).
The company, founded in 1995 by two chartered accountants, Krishnakumar Karwa and Prakash Kacholia, is primarily engaged in the broking business and has a network of over 400 retail outlets across the country.
