Market regulator Securities and Exchange Board of India (SEBI) has begun initial probe into the ‘flash crash’ of National Stock Exchange (NSE) index Nifty, which fell by nearly 900 points on Friday morning, halting the trade on the exchange for about 15 minutes. While the NSE blamed ‘abnormal’ orders placed by stock broker Emkay Global in multiple trades of various stocks at low prices for the crash, SEBI is reportedly looking into all aspects of the incident. India has had its share of mini flash crashes. Earlier this year, Nifty futures fell by around 6 per cent in a matter of a few seconds, thanks to an erroneous order that resulted in freak trade.
Friday’s flash crash was of a much greater degree, dragging the Nifty index lower by 15.5 per cent, again in a matter of seconds. This time as well, the source of the problem was an error from an institutional broker, although there were a number of wrong orders in Nifty stocks, which dragged the index lower. The losses for investors, the institutional broker and its client would have been larger, but for the SEBI-mandated circuit breakers that apply when the markets drop sharply. In both of the above-mentioned flash crashes the source of the problem was a manual error, rather than an algorithmic error.
In today’s fast-paced trading world, when losses can mount very quickly, it is imperative that regulators and exchanges put in place controls to minimise losses. In India, the regulator has a pre-trade order filter of 20 per cent for stocks that are part of the Nifty and the Sensex. One way to minimise losses is to narrow this band. This may be reviewed negatively by many traders, but it is possible to make the price band a moving target that moves along with the volume weighted average price. Earlier this year, SEBI had asked brokerage firms to put in place pre-trade filters to ensure that their errors don’t affect the market. However, it stopped short of imposing a strong penalty for defaulters. A harsh punitive regime will force brokerage firms with SEBI’s regulation and minimise risks to the market.
