Sebi finalises norms to prevent flash crash

Prescribes multi-level checks on order quantity, margin with exchange, dummy filter for stocks

Market regulator the Securities and Exchange Board of India (Sebi) has finalised guidelines to prevent instances like flash crash. In last October, Nifty had seen such a crash. The regulator is prescribing multi-level checks before any big order is placed and the checks will be on quantity ordered, margin available with the exchange indicating exposure limits available with brokers and dummy filter for stocks in index and traded in futures.

An error in order placed by the Emkay Global Financial Services had resulted in the 900-point flash crash of the NSE index in first week of October. In past also such incidents had happened due to punching error. The regulator will soon announce norms and issue a circular to exchanges to execute multi level checks to prevent such incidents, said a Sebi official.

First check will be on the quantity of the order and any order above that quantity or numbers of shares for purchase or sell will not be accepted at one go. In case of error by Emkay, the dealer has entered the value of the order as the quantity of Nifty-50 basket. Such mistakes could be caught once the order restrictions are in place.

Another check will be through margin available with the exchange. When a broker’s total position exceeds the 90% of the margin available with the exchange in the broker’s account, an alert will be sent and hence any big order when margin requirement is higher than the available limits, the system will not accept the order in first place.

At present, when position exceeds the margin available, the additional margin is asked for at the end of the day. When the new provision is implemented, alert will be sent about margins being exhausted. Big orders that may have been punched by an error could be stopped at this level.

The Sebi has also decided that there should be dummy circuit filters for stocks which are in the indices and allowed to be traded in futures and options (F&O) segment. Currently, there is no circuit filter for F&O stocks. There is no proposal either to have hard circuit filters for them but a dummy filter of 10% is being prescribed so that by error if wrong order is placed than system will not accept order for price more than 10% at a time. However, price movement of more than 10% can also happen but not at one go, explained the official. For index, 10% movement is at hard circuit level which means market will take halt of one hour if the index moves 10% either side. In case of F&O stocks, trading will not halt after 10% movement.

All the above measures will be implemented by the exchanges but irrespective of the errors in placing orders, these measures will bring over all discipline in the market.