Algorithms had no role to play in Nifty fall, say NSE officials

More details are emerging on Friday’s ‘flash crash’ incident. In a communique to trading members, the National Stock Exchange (NSE) on Monday revealed that algorithms had no role to play in S&P CNX Nifty futures’ near-seven per cent crash within the space of a few minutes last week. Such a message was put out by the exchange on Monday morning on broker trading terminal NOW (Neat-on-web).

However, NSE in the same message said the crash in Infosys shares “seems to be due to a member’s algorithm malfunctioning”. NSE further said, “Nifty price variation on that day is also being examined and prima facie, the price fall does not appear to be born out of similar circumstances. A detailed examination is underway and a report is being submitted to Sebi (Securities and Exchange Board of India).”

NSE, according to regulatory sources, gave its preliminary investigation report based on data analysis to Sebi, at around noon on Monday. The exchange did not comment on queries sent by Business Standard.

Last Friday, the S&P CNX Nifty index fell seven per cent within minutes — from 5,300 to 5,000 during the second half of the trading session — causing panic among traders and institutional players, as stop-losses were triggered. Prior to that, the Infosys stock fell 20 per cent during the first half.

Market analysts had blamed these sudden drops on algorithmic trading used by a number of large institutional players.

Market experts, who had analysed the incident, were of the view that the entire incident was most likely due to some changes made in algorithmic programmes.

Concerns have been raised about algo trading and many have blamed volatility in the markets to the high frequency trading (HFT) being allowed. The process allows a trader to construct the entire market depth, taking advantage of which they can design their programmes to hit at prices, which are significantly away from prevailing market price. In other words, those with trading servers close to the exchange engines can execute their order in nano-seconds.

Brokers who do not have co-location facilities have exposure to only the top five buy or sell orders and will not know if their order will get executed at a price far away from the prevailing price.

On Friday, the crash occurred as ‘sell orders’ got executed till the last available trade. The market regulator had recently issued guidelines for algo trading and aims to make the laws more stringent.