NSE justifies stand on flash crash

Says investor interest prompted it to keep F&O segment open in last October's event, in response to Sebi showcause on Emkay case

It was triggered by an ‘error’ and not an ‘event’. That’s how National Stock Exchange (NSE), in its response to the Securities and Exchange Board of India (Sebi)’s show-cause notice, has justified a decision not to shut its equity segment for two hours on October 5, 2012, when a  trade caused a 900-point dive in the Nifty in two minutes, resulting in the index hitting the lower circuit filter.  

Sebi rules require exchanges to shut trading for two hours if the benchmark indices hit 10 per cent in a single day. NSE had shut the equity segment for only 10 minutes on that day.

In the notice, Sebi also held the bourse responsible for not having enough controls in place to avert the crash. Sebi asked NSE: Why were some orders executed even after the circuit filter was triggered?  Why didn’t NSE shut the F&O (futures and options) segment? Why didn’t it ensure adequate order trade limits at the broker and exchange levels? Why didn’t it inform BSE (the other major exchange)?

CRASH COURSE

• Erroneous trade by Emkay dealer causes a 900-point fall in Nifty on October 12
• Internal NSE probe blamed Emkay for the trades
• Sebi also investigates; also blames NSE
• Emkay appeals SAT against NSE decision
• Emkay asks NSE to reveal its response to Sebi show-cause notice
• NSE sends show-cause notice response to Emkay and seven counterparties on Thursday

NSE has said it was an erroneous ‘fat finger’ trade and it did not shut down the F&O segment because only the Nifty, its benchmark index, had been dragged down. The Nifty had tumbled almost 16 per cent between 9:49 am and 9:51 am that day, while Nifty futures were down 1.7 per cent and the BSE’s Sensex by less than one per cent. NSE argued that as the Nifty’s drop was due to a mistake and not a market-moving event, shutting the F&O segment would have been against investors’ interest.  

The Nifty tumbled after a dealer at brokerage Emkay Global punched a wrong order on behalf of an institutional client. The dealer was supposed to sell worth Rs 17 lakh; he, instead, sold a basket of that many shares in number belonging to the Nifty, sparking a panic. Emkay incurred losses of Rs 51 crore in these trades.

While NSE refused to annul the trade, Emkay approached the Securities Appellate Tribunal to reverse the decision. The brokerage has asked NSE to make available its responses to Sebi’s show-cause notice. NSE sent the responses to the notice to Emkay and the counterparties on Thursday. An NSE spokesperson did not respond to a query on the matter.

On why the circuit filter was not triggered, NSE said this trade barrier on hitting the 10 per cent was triggered but there was a gap of six seconds between the triggering of the circuit filter and stoppage of market orders. A few orders that were in the pipeline in this gap were executed, it said.

On Sebi’s query to why it did not ensure an adequate order trade limit, NSE said it had done away with it in 2005 on brokers’ requests, as BSE did not have it. The order trade limit, Rs 5 crore till it was scrapped, was hurting NSE’s businesses.

NSE has also said it does not check brokers’ systems individually; it relies on system auditors for this. The bourse said it had no reason to suspect the auditor’s clean chit in the case of Emkay. NSE said it had informed the BSE soon after the incident.