Sebi mulls annulment policy for freak trades

Capital markets regulator Sebi is looking to frame a 'trade annulment policy' to cancel the freak trade orders that might have wider ramifications in terms of impact on the indices or other stocks.

The annulment policy would look at safeguarding the broader market interests from the freak orders executed erroneously, such as 'fat-finger trades' or punching errors, as also the trade orders entered intentionally by the manipulators to make illicit gains or to sabotage the overall market sentiments, a senior official told PTI.

Sebi may soon issue a discussion paper on the ways to handle the freak trades executed erroneously, as also the possible manipulative actions disguised as genuine errors, he said.

The issue has already been discussed internally and with the market experts and the proposed steps, subject to a wider consultations, might include a stronger system for checks and balances at the end of market infrastructure institutions like stock exchanges and the intermediaries such as brokerages.

Besides, the regulator would also look at taking strict penal actions if some miscreants or manipulators are found to be behind such incidents.

One of the major freak trades in the recent past was witnessed last year when certain erroneous orders entered by a dealer of brokerage firm Emkay Global led to a flash-crash of over 900 points in the NSE's benchmark index Nifty, forcing the exchange to temporarily halt the trading.

However, a disciplinary panel of the exchange rejected Emkay's plea for annulment of the freak trade and a penalty has been imposed on the brokerage firm. However, NSE's decision has been challenged by Emkay before the Securities Appellate Tribunal.

Sources said that a final decision in this case could be crucial for the proposed trade annulment policy of Sebi, which has been actively considering the ways to handle freak trade like situations and the possible flash crashes in the market subsequently.

Freak trades have often been referred to as 'fat-finger trades' and punching errors, as they are often claimed to have been executed erroneously due to entry of wrong parameters or pressing of wrong keys on trading terminals.

However, the regulator also fears that some manipulative activities might be at work in the name of erroneously entered trade orders.