MUMBAI: The National Stock Exchange of India said 59 erroneous orders prompted a plunge in equities yesterday that briefly erased about $58bn in value, underscoring the growing global concern about the integrity of financial markets.
Trading in the S&P CNX Nifty Index and some individual companies stopped at 9:49 a.m. in Mumbai for 15 minutes after the 50-stock gauge tumbled as much as 16 percent. The volume of stocks in the benchmark index that were traded yesterday almost doubled from the 100-day average, according to data compiled by Bloomberg.
Regulators around the world are probing market structures and electronic trading after a series of malfunctions. In May 2010, high-frequency orders worsened the so-called flash crash, which briefly wiped $862 billion from US stocks. The Nasdaq Stock Market in May this year was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading in Facebook, the largest initial public offering of 2012.
“India has joined the big league with this trading disaster,” A S Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors, which manages about $400m, said by phone from Singapore. “It’s very surprising so many erroneous orders went through. Exchanges and regulators must be one step ahead as systems and technologies upgrade.”
Orders entered by Emkay Global Financial Services Ltd. for a client that led to trades valued at Rs6.5bn ($126m) caused the problem, NSE spokeswoman Divya Malik Lahiri said by phone from New Delhi. Circuit breaker limits enforced by the NSE get activated “after existing orders are executed,” Ravi Varanasi, head of business development at the exchange in Mumbai, said by phone. “We are investigating the reason behind the wrong orders and how checks and balances at the member’s end failed.”
The NSE’s trading limits for the Nifty range from 10 percent to 20 percent. The percentages are translated into absolute points of the index movement at the end of every quarter and applied for the next three months. A rise or decline of 570 points, equal to 10 percent of the Nifty’s closing level of 5703.3 on September 28, is meant to halt trading on any day in the quarter through Dec. 31, according to a circular on the NSE’s website.
“Even if there was order backlog, the index couldn’t have slumped 900 points before halting when the circuit filter was set for a 570-point fall,” Arun Kejriwal, director at Kejriwal Research & Investment Services, said by phone.
Emkay Global’s Managing Director Prakash Kacholia didn’t answer his mobile phone. The broker’s shares plunged by the 10 percent daily limit to Rs31.1.
The Nifty slipped 0.7 percent to 5,746.95 at the 3:30pm close. Reliance Industries Ltd, owner of the world’s largest refining complex, rose 0.6 percent at Rs857.8, rebounding from a 20 percent plunge, while Housing Development Finance Corp, the country’s biggest mortgage lender, lost 5 percent to Rs749.95 after also falling 20 percent.
The NSE, the nation’s largest bourse, controls more than 90 percent of India’s $28bn equity derivatives market and handles 75 percent of the stock trades. The halt, the biggest such problem in more than two years, comes as a burst of policy reforms by Prime Minister Manmohan Singh has propelled Indian stocks to a 17-month high. Foreign investors have plowed a net $16.5bn into local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.
“The crash definitely hurts as there has been a lot of foreign flows in the last two months and any erroneous order would impact investor confidence,” Daphne Roth, head of Asian equity research at ABN Amro Private Banking in Singapore, which oversees about $207bn, said by email.
Combined daily volumes on the nation’s two biggest bourses averaged 989 million shares last month, 27 percent more than in August. In a separate statement, the NSE said it had “disabled” Emkay Global and closed out the broker’s outstanding positions.
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