The National Stock Exchanges (NSE) flash crash could
trigger another overhaul of market rules in India, especially
regarding electronic trading.
The October 5 flash crash highlighted the absence of
pre-trade controls and circuit breakers on the NSE. The
Securities and Exchange Board of India (Sebi) mandates
The Nifty index suffered enormous losses following $122
million in erroneous trades by broker Emkay Global. Although
Sebi mandates that circuit breakers stop the exchange after a
10% drop, order matching at the exchange did not stop until it
fell by 15.5%. Even after the orders stopped, the previously
entered orders continued to execute so the market fell to
The human error by an employee of the broker was
magnified by the exchanges error, said a
Moreover, the equity derivatives market did not stop when
the equities market stopped, violating Sebi rules and imposing
collateral damage on other market participants.
An in-house counsel at an international bank added that Sebi
is looking at why the markets didnt stop, which is a
problem for the exchanges rather than the market participants.
The NSE as well as the Bombay Stock Exchange (BSE) have both
been called upon to answer questions about their circuit
Sebi will also address the exchanges vulnerability to
so-called fat finger issues, which usually happen when trades
are sent directly to the exchanges using the exchange interface
rather than external front-end software.
Rather than impose additional regulations, the exchanges may
look towards front-end software solutions to prevent mistakes,
said the counsel. He said that they may introduce confirmation
pop-ups that ask whether the trader is sure of the quantity of
trades if something seems out of the ordinary.
However the lawyer added that the NSEs flash crash
handling could encourage competition between exchanges,
especially with the
MCX-SX expected to start equity trading after Diwali.
If it is smart, it will take this as an enormous
opportunity, and Im optimistic about how its presence
will make the market more competitive and less prone to
He added that he expects the other exchanges to provide
investors with a more robust exchange environment following the
entrance of the MCX-SX.
Effects on electronic trading
However the counsel said that it was fortunate that this
wasnt from direct market access or electronic trading. He
added, That would have opened regulations up for
scrutiny, and were not sure what Sebi would have come
Sebi has implemented some of the
worlds strictest regulations on algorithmic trading,
requiring approval for individual algorithms. It would be
hard-pressed to consider further scrutiny.
But the exchanges flash crash after a trade of only
$122 million raises questions about the markets depth and
its vulnerability to future errors, especially those involving
The lawyer said that the algorithm question is connected to
the flash crash: most issues that occurred in the flash crash
would apply to an erroneous algorithmic trade.
Instead of a human punching in the wrong numbers, a
badly scripted algorithm could execute a disastrous
trade, he commented.
the recent computer glitch that affected derivatives trading on
the Tokyo Stock Exchange, and noted that like other
exchanges, it has a fairly black and white prescription on how
to deal with erroneous trades which should be unwound.
Comparing provisions elsewhere to those in India, the lawyer
said that Sebi needs more detailed rules on how exchanges deal
with these erroneous trades and system improvements so this
does not happen again.
A key point, however, is brokers insurance coverage.
The counsel noted that after this incident, most brokers
checked their insurance coverage. If the flash crash cost
$10 million for this particular broker, how much does that
policy cover? For most brokers in the market, the policy
coverage is less than $1 million.
Instead of placing more onerous regulations on electronic
trading or front-end software, the counsel added that Sebi may
look at enhancing insurance coverage for brokers and ensuring
it includes fat finger errors and electronic trading issues as
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