Sebi mulls trade cancellation to prevent 'freakouts'

Currently, bourses are empowered to annul trade, have their own by-laws in absence of regulatory framework by Sebi

Market regulator Securities and Exchange Board of India (Sebi) on Wednesday proposed a framework for cancellation or annulment of trades to deal with the growing instances of freak trades.

A freak or erroneous trade is a transaction executed either by a punching error by a market dealer or through malfunction of a trading system.

Currently, exchanges are empowered to annul trades and have their own bye-laws in the absence of a regulatory framework.  

To have uniformity and transparency, the market regulator, in a discussion paper, proposed a regulatory framework for the annulment of trades.

Sebi has said that trades that are executed shall not be annulled under normal circumstances. “Trade annulment should only be considered under exceptional circumstances (fraud, market manipulation, regulatory action or error that impacts the sanctity of price discovery, etc). In such cases, the exchange may also suo moto undertake examination of trades for cancellation,” Sebi has said in a discussion paper.

The regulator has said as the decision to cancel trades impacts a large set of market users, it should only be invoked in the interest of the market at large.

“Such traders/investors may find themselves at the losing end for no fault of theirs in the event such ‘erroneous’ trades are cancelled or modified,” the paper added.

The exchanges will have to be clearly define circumstances under which a trade annulment request shall be accepted. The regulator has said annulment shall be accepted if all the parties involved are in agreement to do so.

Under the proposed regulatory framework for trade annulment, Sebi has proposed to apply deterrent penalties in the form of fines or suspension of trading rights of the stock broker. It has also prescribed a time limit for accepting a request for annulment.

Typically, trades executed on exchanges are considered final. However, in some exceptional cases, including the volume surge during Muhurat day trading on BSE triggered by faulty algorithm, exchanges have annulled trades.

Refusal of trade annulment also can be a contentious issue between an exchange and a broker as seen in case of the infamous 'Emkay flash crash'.

The domestic brokerage Emkay Global Financial Services and the National Stock Exchange (NSE) are locked in a legal battle over the latter's refusal to annul trades, which led to the collapse of the Nifty index, by 15 per cent in October last year.

The market regulator has invited public comments on its proposals before October 31.