Barely three weeks after the flash crash in Infosys and Nifty index futures, the equity derivatives segment on the National Stock Exchange (NSE) went for a toss on Monday due to a ‘technical glitch’. Trading in the futures and options segment suffered for nearly an hour as NSE tried to solve the issue, with order entries stopped or brokers unable to receive trading confirmations.
Earlier, concerns had been raised over algo trading and many had blamed the volatility in the markets to such high-frequency trading (HFT).
For nearly an hour, orders did not match as a price quote on NSE showed the best seller was at 5,875, while the best buyer was at 5,892. Brokers say this was a reverse quote and not usual. “How can a buyer say that I want to buy higher and a seller say I want to sell lower?” asked a broker.
This created chaos for order matching. As a consequence, all futures products, such as the S&P CNX Nifty, Bank Nifty, CNX IT and the newly-launched FTSE were hit and prices frozen since 1.36 pm. It was only around 3 pm that trading again started functioning smoothly. Meanwhile, the futures contract of another benchmark index, the Sensex of BSE, had slipped by 225 points, only to recover during the last half an hour. Trading volumes in BSE’s derivatives segment were a little over Rs 23,000 crore.
In a statement, NSE cited an erroneous order cancellation request by a member as a key reason for the glitch. “An erroneous order cancellation request was received by the trading system on Monday, which disrupted the execution process. Concurrently, there was a malfunction in the network layer. These led to the interruptions in the derivative trading system. It was therefore, required to start the process on the contingency machine for the market to function in an orderly manner. The contingency machine was pressed into service in a short span of time and matching continued,” NSE said.
According to technology experts, who are also working with other leading exchanges, an exchange trading system is connected via trader work stations where people punch in orders. These are then connected to HFT systems. Algo trades passing through HFT are developed by third-party programmers who are recognised by the exchanges.
So, if an algo sends some junk or abnormal data, the exchange trading system may react differently and it may lead to disruption of order execution, which is what seems to have happened, said an expert. This affected the matching system, as the best buy and sell quotes were unusual.
Traders say domestic markets were better able to weather the global storm on Monday. While all the key benchmark indices fell over two per cent in Europe, domestic markets were spared the pain. In most cases, the exchanges have the capacity to purge pending orders.
A circular of the Securities and Exchange Board of India (Sebi) says all instances of slowdown or breakdown in a computerised trading system, even if for less than five minutes, should be reported to a standing committee formed by the exchange for its consideration. Later, this is to be taken up with the governing board or counsel of the stock exchange. In case the stoppage is for more than five minutes, the exchange has to give a report to Sebi explaining why it happened and issue a press release.
Such trading glitches are taking place more often than they should. Sebi is already inquiring into a near-20 per cent crash in Infosys stock futures and a near-seven per cent fall in Nifty futures on April 20.