Saturday, October 6, 2012

Was Friday’s ‘flash crash’ in the Nifty an error or a scam?

All seemed well when the stock market opened in the morning on Fri. Oct 5 ‘12. The previous evening’s cabinet meeting had passed the Companies Bill (2011 amendments) and FDI in insurance and pension. The Nifty was expected to open higher, and it did. Out of the blue at 9:50 am, the Nifty crashed by 900 points before you could say ‘Jack Robinson’.

10% circuit filter kicked in and trading was halted at the NSE for 15 minutes, while trading continued at the BSE. When normalcy was restored and trading resumed at NSE, Nifty quickly climbed back almost to the level from which it had fallen. But the bullish sentiment had been badly dented.

What happened? NSE authorities were quick to mention that there were no technical problems with NSE’s software. Instead, fingers were pointed at a particular brokerage house that had entered 59 ‘erroneous’ trades on a basket of Nifty stocks worth Rs 650 Crores. The brokerage house had been ‘disabled for trading’ and the matter was being investigated.

There was no clarification from the brokerage house. All its senior managers apparently left the office in the morning. There were rumours floating around that some of them were at the NSE’s office, trying to sort out payment issues. What about the likely loss that the brokerage house may have suffered due to the ‘error’? Unconfirmed figures in the range of Rs 80 Crores to Rs 200 Crores were being bandied about.

So, was it really an ‘error’ or was it another one of those periodic scams perpetrated to bail out some one who was caught short in a rising market? The truth may never be known – going by the lack of transparency of NSE officials and the poor track record of SEBI in bringing scamsters to justice.

But if I had to make a bet on one or the other, I’d go with a scam. Here are the reasons why:

  1. An ‘error’ can occur with one or two trades. But 59 trades – one after the other? It seems too much of a coincidence.
  2. The timing of the ‘erroneous trades’ within the first hour of trading, when volumes are typically low in Nifty cash, raises questions. A series of trades worth Rs 650 Crores could bring the Nifty to its knees, though daily volumes top Rs 10000 Crores.
  3. The 10% circuit breaker should have been applied as soon as the Nifty dropped by 570 points. Why was it applied only after a 900 points (15%) fall?
  4. As per SEBI guidelines, if a circuit breaker is applied before 1 pm, trading ought to be suspended for 1 hour. Why was trading resumed after 15 minutes?
  5. When trading is suspended due to circuit breaker in one exchange, the other exchange should also have stopped trading. But no shut down happened at BSE.

All of the above point to some thing more than an ‘error’ by a dealer at a brokerage terminal, entering trades for an institutional investor. Will the SEBI get to the bottom of this? How about cancelling all the trades that took place from 9:45 am to 10:15 am? Surely that would help small traders and investors who got stopped out by the sudden ‘flash crash’ in the Nifty? Who will restore the confidence of small investors – many of whom believe that the stock market is a big casino with the odds always favouring the house?

Related post

Was it a freak ‘error’ trade or a ‘short and distort’ scam?


Jasi said...

What intrigues me more is that these observations aren't rocket science. Some of these are basic self-rule-breakages. Why isn't there a hue and cry left right and centre?
Thanks as always Sir for this write-up. I'm certain there are many out there like me, who dismissed this as a perceived "error". Kudos to you for spreading awareness.

Subhankar said...

Appreciate your comments, Jasi.

Apparently the dealer concerned got confused about the size of the Nifty basket - mistaking the total value of the sell order as the quantity. I find that explanation a little hard to digest!

Suresh said...

Subhankar sir

I feel the error should be rectified by reversing all trades that happened between 9.45 am and 10.15 am except the one executed by this 'single broker/dealer'. In addition make this 'broker/dealer' to square off their position. By this way (a) the small retail investor is taken care off (b) the so called big investor, if at all any, does not get a chance to exit and (c) the 'broker/dealer' gets punished for their erroneous entry!


Subhankar said...

Couldn't agree with you more, Suresh.

But does SEBI have the desire or courage to unveil the truth?

Jasi said...

Check this out from todays businessline for some very interesting thoughts ...