Record Crash Prompts Indian Exchanges to Seek New Limits

Indian exchanges asked the market regulator to narrow the range it allows some stocks to trade after erroneous orders caused a record plunge in the S&P CNX Nifty (NIFTY) Index, according to officials familiar with the proposal.

Price limits for 216 of the biggest and most liquid stocks should be lowered from 20 percent to 9 percent, the three officials said. The measure was proposed to the Securities & Exchange Board of India by exchange executives at a meeting in Mumbai on Oct. 6, said the people, who asked not to be identified as the talks were private.

Trading in the benchmark Nifty and some stocks stopped for 15 minutes on Oct. 5 after the 50-stock gauge sank 16 percent. The incident, which briefly erased $58 billion in value, is the latest in a series of mishaps that has put pressure on regulators globally to prevent market errors. Bad trades sent Kraft Foods Group Inc. (KRFT) up as much as 29 percent on Oct. 3, and in May, the Nasdaq Stock Market blamed software for delays in order confirmations in the debut of Facebook Inc.

“Everyone is very sensitive to these electronic errors,” Adam Mattessich, head of international trading at Cantor Fitzgerald LP, said by phone from New York on Oct. 5. “It’s the kind of thing that could be nothing or it could become a financial calamity.”

Photographer: Kuni Takahashi/Bloomberg

Trading in the benchmark Nifty and some stocks stopped for 15 minutes on Oct. 5 after the 50-stock gauge sank 16 percent. Close

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Photographer: Kuni Takahashi/Bloomberg

Trading in the benchmark Nifty and some stocks stopped for 15 minutes on Oct. 5 after the 50-stock gauge sank 16 percent.

Intraday Slump

Of the 4,100 companies on the National Stock Exchange of India, the nation’s largest bourse, 19 slumped 19 percent or more intraday. Reliance Industries Ltd. (RIL), the biggest company by market value, rebounded from a 20 percent plunge to close up 0.6 percent at 857.8 rupees. The stock dropped 4.5 percent to 819.4 rupees today, the most in more than seven months. Housing Development Finance Corp. (HDFC), the biggest mortgage lender, also fell as much as 20 percent on Oct. 5. It rose 0.7 percent to 750.6 rupees today.

The Nifty retreated 1.2 percent to 5,676 at the 3:30 p.m. close, the steepest decline in more than two months.

As many as 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd. (EMKAY) in Mumbai that led to trades valued at 6.5 billion rupees ($125 million) caused the problem, the NSE said in a statement on Oct. 5.

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 on Oct. 5. “We are investigating the reason behind the wrong orders and how checks and balances at the member’s end failed.”

‘Review Orders’

The NSE’s trading limits for the Nifty index range from 10 percent to 20 percent. The exchange and rival BSE Ltd., Asia’s oldest bourse, have price caps on individual stocks that range from 5 percent to 20 percent. Stocks traded in the futures and options segment are permitted to rise or fall 20 percent in a single session without a halt in trading.

“Lowering these limits may prevent flash crashes in the future,” Nirakar Pradhan, chief investment officer at Future Generali India Life Insurance Co. in Mumbai, said by telephone yesterday. “Traders will get room to review and modify their orders” after price limits are reached, he said.

Exchange officials are meeting the market regulator today to discuss the implementation of the proposal, the people said. S. Ramann, executive director at the Securities and Exchange Board, declined to comment on the plan. BSE spokesman Ketan Mehta was not immediately available for comment.

In May 2010, high-frequency orders worsened the U.S.’s so- called flash crash, which briefly wiped $862 billion from the nation’s stocks. While the drop in India drew comparisons with rout in American equities, the U.S. event spurred many times the losses of the Nifty’s drop and affected more stocks.

U.S. Crash

About 20 companies in India saw declines of 19 percent or more on Oct. 5, compared with the more than 300 securities that lost at least 60 percent during the flash crash before the trades were canceled, a September 2010 report from the U.S. Securities and Exchange Commission and Commodity Futures Trading Commission found. The decline and rebound in the Nifty lasted seconds, compared with more than 15 minutes for stocks, futures and indexes in the flash crash.

Narrowing the price cap to the proposed 9 percent may be “too low in light of a relatively fewer free-trading shares,” Seth Freeman, San Francisco-based chief executive officer at EM Capital Management LLC, said by e-mail today. “This, coupled with ETFs and other index based vehicles that hold in common a large number of the same shares, can move the market in either direction. Aggregate shares in a single name traded poorly could drastically move prices beyond 9 percent.”

Free-float shares exclude those held by company founders and strategic partners, and are the basis for Nifty rankings.

Policy Reforms

The NSE controls more than 90 percent of India’s $28 billion equity derivatives market and handles 75 percent of the stock trades. The stoppage, the biggest such problem in more than two years, comes as a burst of policy reforms by Prime Minister Manmohan Singh propels Indian stocks to a 17-month high. Foreigners have plowed a net $16.5 billion into local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.

Combined daily volumes on the nation’s two biggest bourses averaged 989 million shares last month, 27 percent more than in August, data compiled by Bloomberg show. Trading last year in the Nifty, at 35.5 billion shares, was the lowest in four years.

“It’s not something that India needed at this stage when volumes are just beginning to recover,” A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte., which manages about $400 million, said by phone from Singapore on Oct. 5.

Emkay in a statement issued Oct. 6 said the “obvious and apparent error would justify the annulment of these trades,” on the NSE. The trades won’t be scrapped as the exchange’s systems weren’t at fault, said Varanasi.

Emkay’s shares plunged by the daily limit of 10 percent for a second straight day to 28 rupees.

To contact the reporter on this story: Santanu Chakraborty in Mumbai at schakrabor11@bloomberg.net

To contact the editor responsible for this story: Allen Wan at awan3@bloomberg.net

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