The plunge and rebound in Indian stocks that pushed the S&P CNX Nifty Index down 16 percent in eight seconds underscored concern about financial markets.
Trading in the Nifty and some companies stopped for 15 minutes in Mumbai yesterday after the 50-stock gauge tumbled as much as 16 percent. A brokerage that mishandled trades for an institutional client was to blame, according to the National Stock Exchange of India.
Indian Finance Minister Palaniappan Chidambaram told reporters in Mumbai today that the government will investigate the stock plunge, as regulators around the world probe market structures and electronic trading after a series of malfunctions. 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. The Nasdaq was this May overwhelmed by cancelled orders and trade confirmations were delayed in the public debut of Facebook Inc., 2012’s largest initial public offering.
“Everyone is very sensitive to these electronic errors,” Adam Mattessich, head of international trading at Cantor Fitzgerald LP, said by phone from New York. “It’s the kind of thing that could be nothing or it could become a financial calamity.”
Orders entered by Emkay Global Financial Services Ltd. that led to trades valued at 6.5 billion rupees ($125 million) caused the drop, said Divya Malik Lahiri an NSE spokeswoman in 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 calculated into index points 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 Sept. 28, is meant to halt trading on any day in the quarter through Dec. 31, according to a circular on the NSE’s website.
The volume of stocks in the benchmark index that were traded almost doubled from the 100-day average, according to data compiled by Bloomberg. An index of Indian stocks traded in New York slipped as much as 1.2 percent.
“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 Pvt., said by phone. “This is a system failure. Blaming a broker does not absolve the exchange of the lapse on their system’s part.”
“I am assured that there is no systemic risk” to Indian markets, Chidambaram told reporters. “The NSE is looking into it and SEBI will also investigate the matter,” he said, referring to the financial regulator.
The NSE’s systems weren’t at fault, according to the exchange’s Varanasi.
“There is no question of any glitch or malfunctioning in NSE’s systems,” he said by e-mail. “The broker’s dealer put in an erroneous quantity in the orders, which is being investigated.”
Emkay Global Managing Director Prakash Kacholia didn’t answer his mobile phone. The broker’s shares plunged by the 10 percent daily limit to 31.1 rupees.
While the drop in India drew comparisons with the rout in American equities on May 6, 2010, the U.S. event spurred many times the losses of the Nifty’s plunge and affected more companies.
About 20 stocks 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.
“It’s definitely concerning but we feel it was a fat-finger mistake rather than a market structural issue,” Ben Rozin, who helps manage the $600 million Manning & Napier International Fund, which includes Indian stocks, said by phone from Rochester, New York. “When we look at the Indian equity market, we think it’s pretty well run, and that this has very low impact.”
The NSE, India’s largest bourse, 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. Foreign investors have plowed a net $16.5 billion into local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.
The Nifty slipped 0.7 percent to 5,746.95 by the 3:30 p.m. close of trading yesterday. Reliance Industries Ltd., owner of the world’s largest refining complex, rose 0.6 percent at 857.8 rupees, rebounding from a 20 percent plunge, while Housing Development Finance Corp., India’s biggest mortgage lender, lost 5 percent to 749.95 rupees after also falling 20 percent.
Of the 4,100 companies trading on the exchange, 19 fell 19 percent or more intraday. Mumbai-based Reliance dropped from 856 rupees to 816.7 in one trade at one second before 9:51 a.m., traded again at that price, then rebounded. A second later, it fell to 682.35 rupees in two trades, Bloomberg data show.
The stock jumped back to 856 during the same second. A total of six trades occurred below 840 rupees during the session, all of them at the bid price.
Housing Development Finance opened at 775.80 rupees and traded at an average price of 753.63 during the day. Thirty-five trades occurred at prices below 740 rupees. The day’s low was reached because of two trades at 2 seconds before 9:51 a.m. executed at a price 16 percent below the previous transaction.
An index of Indian stocks traded in New York fell the most since Sept. 25, after rising over the previous two days. The Bank of New York Mellon India ADR Index dropped 1.2 percent to 1,071.40 by 2:47 p.m. American depositary receipts of Infosys Ltd., India’s second-largest software exporter, declined for the first time in seven days, losing 1.5 percent to $48.93.
“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 $207 billion, said by e-mail. “Investors would still ultimately look to future reforms, not just related to the bourse but also to the economy.”
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,” Aquarius’ Rajan said.
In a separate statement, the NSE said it had “disabled” Emkay Global and closed out the broker’s outstanding positions. N. Hariharan, a spokesman at the Securities & Exchange Board of India, the market regulator, wasn’t available for comment.
The NSE, founded in 1992, began trading equities electronically in 1994, spurring the 137-year-old BSE, which runs the BSE India Sensitive Index, to follow suit.
Trading at both exchanges takes place through an open electronic limit order book, where order matching is undertaken by the trading computer.
The entire process is order-driven, meaning market orders placed by investors are automatically matched with the best limit orders and buyers and sellers remain anonymous. The order-driven market brings more transparency by displaying all buy and sell orders in the trading system, though there’s no guarantee that orders will be executed because of the absence of market makers.
All orders must to be placed through brokers, many of which provide online trading facilities to retail customers. Institutional investors can gain direct market access through trading terminals provided by brokers for placing orders directly into the stock market trading system.
Competition among Indian bourses is poised to intensify with a third bourse, the MCX Stock Exchange, planning to start trading equities around Diwali, the Hindu festival of lights, which falls in November.
“With another exchange set to be operational in about a month investors would have an alternative,” Kejriwal of Kejriwal Research said.