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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Record crash prompts Indian exchanges to seek new limits

Record crash prompts Indian exchanges to seek new limits

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Director - Equity Analytics
Director - Equity Analytics

By Santanu Chakraborty

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% to nine per cent, the three officials said.

The measure was proposed to the Securities & Exchange Board of India by exchange executives at a meeting in Mumbai on 6 October, 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 5 October after the 50-stock gauge sank 16%. The incident, which briefly erased US$ 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. (KRFT) up as much as 29% on 3 October, 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 5 October. “It’s the kind of thing that could be nothing or it could become a financial calamity.”

Of the 4,100 companies on the National Stock Exchange of India, the nation’s largest bourse, 19 slumped 19% or more intraday. Reliance Industries Ltd. (RIL), the biggest company by market value, rebounded from a 20% plunge to close up 0.6% at Rs 857.8. Housing Development Finance Corp. (HDFC), the biggest mortgage lender, lost five per cent to Rs 749.95 after also falling 20%.

As many as 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd. (EMKAY) in Mumbai that led to trades valued at Rs 6.5 billion (US$ 125 million) caused the problem, the NSE said in a statement on 5 October.

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 5 October. “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% to 20%. The exchange and rival BSE Ltd., Asia’s oldest bourse, have price caps on individual stocks that range from five per cent to 20%. Stocks traded in the futures and options segment are permitted to rise or fall 20% in a single session without a halt in trading.

“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 today to discuss the implementation of the proposal, the people said. S. Ramann, executive director at the Securities and Exchange Board, 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 US$ 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.

About 20 companies in India saw declines of 19% or more on 5 October, compared with the more than 300 securities that lost at least 60% 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.

“It’s definitely concerning but we feel it was a fat-finger mistake rather than a market structural issue,” Ben Rozin, who helps manage the US$ 600 million Manning & Napier International Fund, which includes Indian stocks, said by phone from Rochester, New York on 5 October. “When we look at the Indian equity market, we think it’s pretty well run, and that this has very low impact.”

The NSE controls more than 90% of India’s US$ 28 billion equity derivatives market and handles 75% 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 US$ 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% 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,” A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte., which manages about US$ 400 million, said by phone from Singapore on 5 October.

Emkay in a statement issued 6 October 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% to Rs 31.05 on 5 October.

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