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N Sundaresha Subramanian: Freak crash, Mrs Caeser and the game of perceptions

If a perception is allowed to emerge and grow that the systems and standards in a particular exchange are short of desirable levels, the impact could be devastating

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The freak crash during Friday’s early morning trade could not have come at a worse time for the National Stock Exchange. Trading in the benchmark Nifty and some stocks stopped for 15 minutes on October 5 after the 50-stock gauge sank 16 per cent. Now, all sorts of demands from putting caps on derivatives stocks to banning high frequency trading are being heard.

Though the exchange has said all was well at its end and it was just the mistake of an individual trader at Emkay Global, competition is usually quick to pounce on such issues.

“The market at is working fine and trading members are informed that there are no issues technical or otherwise at BSE,” the South Bombay rival was quick put out a press release at 10:20 am on Friday telling the world that problem, if any, was only at NSE.

The rival was only returning favours. In the past, NSE's team has been accused of not allowing algorithms approved by rival exchanges picking holes in risk management procedures.

Market participants are also raising issues about how the exchange could arbitrarily decide to restart the trades quicker than the mandatory period prescribed under law. The errant Emkay is asking for annulment of trades.

Surprisingly, even some political parties, who do not normally include stock market investors in their definition of aam admi, have jumped into the fray asking for an investigation and demanding that losses to "small shareholders" be recouped. Were they batting for the rivals? Now, nobody is sure if any small shareholder lost because if at all anyone bought shares sold by Emkay, they would be laughing all the way to the bank.

I say all this comes at a wrong time for because it is gearing up for competition from new entrants and rejuvenated older players this Diwali.

It is not just enough to have state-of-the-art system. If a perception is allowed to emerge and grow that the systems and standards in a particular exchange are short of desirable levels, the impact could be devastating irrespective of whether they are actually up to the mark or not. Such freak crashes surely do not help the perception of the NSE as technologically sound fortress, it was perceived to be. It is up to the exchange's tech team to ensure such crashes do not recur, even in so-called fat finger trades.

Perceptions are more important than they appear in the exchange game.

In fact, NSE itself was a beneficiary of such a perception in its early days. BSE, then the dominant exchange, was often accused of being a ‘den of thieves’. Commentators usually described how insider trading and front running are rampant and brokers are hand in glove. They were also perceived to be novices in technology.

Now, it is difficult to ascertain how much of these statements were just allegations that helped build a perception and how much of these are hard facts that will stand scrutiny in a court of law. Over a decade later and after advent of such great technology, nobody can claim to have eliminated insider trading or front running brokers.

But the flaw of the BSE management lay in the fact that it did not do enough to address this perception.  Instead of taking the bull by its horns, it went into hibernation. Had it acted in time, it would also have not lost its flagship product ‘badla’. It eventually lost the volume game as NSE was more comfortable with the single stock futures and other derivative products.

It was downhill from there on. Therefore, an exchange like Caeser’s wife must not only be chaste, but also be above suspicion. NSE will do well to remember that.

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