Friday’s freak trade by a young trader at Emkay Global sparked off a steep fall in Nifty, causing it to crash by 900 points. Newspapers all over have been reporting it incessantly, with the NCP and BJP even ordering for a CBI probe, as they feel, that it was “a conspiracy to destabilize the economy”.
This is how it happened: While executing an error to transact in the Nifty cash basket, the young tradercommitted a grave error. Instead of selling Rs 34 lakh worth Nifty cash basket, he mistakenly punched in orders for sale of 34 lakh Nifty cash baskets comprising of stocks in the Nifty-50. This led to a massive sell-off worth Rs 650 crores, resulting in a 15% drop in the NSE bellweather, Nifty. Trading was halted for 15 minutes. Emkay, later had to buy the shares at a higher price, resulting in it taking a hit of Rs 60 crore.
What we see then is, that it wasn’t a ‘flash-crash’ or a ‘man vs machine’ thing or a fault in an expensive algorithm that brought about the crash. But it was simply the result of human error. It was a case of the wrong pressing of a button.
But if you dig in a little deeper many questions still remain unanswered:
1) A lot of traders put in bid prices upto 20% lower than the previous day’s closing price in hope that if and when prices crash they’d be the biggest gainers. The trader at Emkay, while putting in orders for the sale, put in a market order (liquidity at any price) instead of a limit order. This meant that the shares were sold at the earliest available price to get maximum liquidity and was sold to those standing to buy at a price 20% cheaper (in most stocks) than the last closing. Had the trader put in a limit order, the loss would have been much lower.
2) Usually, individual trading terminals at equity broking houses have a limit as to the amount a trader can buy/sell on a single order, usually, Rs 25 crore. If he tries to go beyond that, the internal system flags it off and the terminal is disabled. That such a big sell-off from the one single terminal did not immediately raise any flags, brings to the fore the weak risk management of Emkay Global. The problem in this case was definitely that on part of the broker. They should’ve capped the limit on each terminal. An ex-trader at Edelweiss said that, had the same thing happened at Edelweiss, the trades would never have been executed.
3) The NSE has filters (cooling periods) put in place at various levels – 10, 15 and 20 percent. The cooling period should have come into effect at the first steep decline but trading didn’t stop until a much further decline. The NSE may argue that because the trade was punched in as one order the system couldn’t shut off. But the fact of the matter is that if NSE (on which 90% of daily volume of equity trade happens) doesn’t have its systems in place, little can be said of the systems in place at other exchanges. Another surprising thing was that, only the cash market was closed and not the future & options market
Emkay as well as a section of other brokers have called for the NSE to reverse the trades which caused the loss as is the practice globally as well. But the NSE is still investigating. The magnitude of the crash was such that it is bound to attract further investigation by SEBI. It also brings to notice the fact that a small error by a relatively small brokerage can bring the entire market to its knees and cause panic. If India is to continue on its steady march of progress, better systems definitely need to be put in place to avoid such embarrassing mistakes.