Nifty crash case: Sebi censures NSE; orders independent review

Coming hard on top stock exchange NSE for its conduct with regard to 'freak' 920-point crash in benchmark index Nifty, regulator Sebi today censured the bourse and ordered an independent comprehensive review of its processes and systems to ensure overall market stability.
In a strong-worded order, Sebi also asked National Stock Exchange (NSE) to be "careful and cautious in its dealings in the securities market and comply with all the legal requirements that govern its functions as a stock exchange".
Capital markets regulator Sebi also said that "the system followed by NSE is not robust" and the incident, which took place nearly two years ago on October 5, 2012, shows that "wrong action on the part of one individual could result in bringing the entire system to a halt".

In the order, Sebi's Whole Time Member Prashant Saran said: "NSE is directed to carry out a comprehensive review, by an Independent Expert of the processes followed, checks in place, systems employed by NSE, not only in respect of the situation specific to this case but also for maintaining stability of markets in general."
The consultant would need to "suggest a more robust securities trading system" and submit its report to NSE within a period of three months from the date of this order.
On receipt of the report of the consultant, NSE has been asked, within a period of three months thereafter, to submit a report to Sebi along with its 'Plan of Action'.

The case relates to a sudden 920-point of 16 per cent plunge in the NSE's benchmark index Nifty, which is widely followed by investors in India and abroad, on October 5, 2012, despite the systems requiring circuit breakers -- first at 10 per cent and further at 15 per cent movements within a day requiring halt in market trading.

The 10 per cent index circuit breaker for that time was 570 points, while the 15 per cent level for the circuit breaker was 860 points.
In its 40-page order, Sebi said its investigation found various lapses on the part of NSE including that of "not sending 'halt' trigger to its matching engines at the instance of breach of 10 per cent circuit breaker" on that day.

Further, the exchange did not halt trading exactly at 10 per cent and 15 per cent circuit breaker limits and did not cut short the market halt duration, the order said.
The regulator said that NSE did not halt trading in its equity derivatives segment when the circuit breaker was triggered in the cash market apart from not "co-ordinating with other stock exchanges regarding the market halt".
Citing these lapses, Sebi said the exchange failed to adhere to the regulator's norms and also failed to "effectively ensured that its stock brokers have necessary risk control systems and did not have a system at its end (as orders pass through its platform to be executed as trades) to manage risk in the event of failure of stock broker's risk management system."

"This had impacted market integrity and orderly trading on October 05, 2012. In view of the above, NSE has not in spirit adhered to the requirements of the SEBI Circular ... ," the order said.