An error in market plunge

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On October 5, the Nifty index benchmark was halted in trading for about 15 minutes after the major 50 stocks sank 16 per cent.

Out of the 4,100 companies listed on the National Stock Exchange of India, the nation’s largest bourse, 19 counters slumped 19 per cent or more intraday.

On that day, the biggest trading company by market value – Reliance Industries Ltd rebounded from a 20 per cent plunge to close up 0.6 per cent at 857.8 rupees.

Another listed company – Housing Development Finance Corp who is the biggest mortgage lender, lost five per cent to 749.95 rupees after also falling 20 per cent.

The incident was ironical as almost the same event occurred on May 6, 2010 when the Dow Jones Industrial Average Index (DJIA) fell 1,000 points in one single trading session.

On that unfortunate day, investigations reported after the incident that wrong buttons were entered in market orders that triggered a series of stop orders in causing the plunge.

The cause of mishap by a particular institution and its dealer could not be penalised as all orders of supply and demand were lined-up in good structure and no intention of willful activities was planned.

On the recent event that occurred on October 5, about 59 erroneous trades by a dealer at Emkay Global Financial Services Ltd.

(Emkay) in Mumbai led to a serial of selling orders in melting down the Nifty market.

The value of trades that was supposed to be entered into the market estimated at 6.5 billion rupees (US$125 million).

But due to the mishandling of human error, the destruction of price plunge dissipated about US$58 billion in the India equity markets.

So the fear of technical glitch has really scared regulators now.

Both the judiciaries and investors begin to wonder if the system of current ‘advanced’ electronic default can be trusted when a few simple wrong button entries executed by a new institutional trainee could cause a huge disaster like this.

Despite many investigations still going on to search for the reasons for losing control of such fat fingers, it will not be justifiable to see a future global collapse in financial markets if the same reason recurs.

After October 5, Indian Exchanges asked the US market regulators to narrow the range of daily trading activities to prevent the similar mishap from happening again.

Currently, New York Stock Exchange (NSE) has trading limits for the Nifty index range from 10 per cent to 20 per cent.

The exchange and rival BSE Ltd, Asia’s oldest bourse, had price caps on individual stocks that ranged from five per cent to 20 per cent.

Stocks traded in the futures and options segment are permitted to rise or fall 20 per cent in a single session without a halt in trading.

Meanwhile, the US regulatory board is working to revise the new circuit-breaker with reduced limits to protect the market values from unprecedented technical errors.

One day after the incident, Emkay said on October 6 that the “obvious and apparent error would justify the annulment of these trades”.

However, it has been well-known that all trades executed through an exchange based on fair trading in supply cum demand will not be busted.

Likewise, NSE officials claimed that those trades executed on October 5 would not be scrapped as the exchange’s systems were not at fault.

In fact, Emkay’s shares plunged by the daily limit of 10 per cent to 31.05 rupees on October 5 and have been marginalised by investors.

In today’s modern world of advanced technology, every industry is relying heavily on electronic and IT systems to function for mega-billion dollars of daily turnover.

The financial industries on global basis are especially reliant on these infrastructures to replace human labour and speed up real-time process.

At the end of the day, are we becoming more vulnerable to the impact of technical breakdown that could cause losses in mega-dollars or have these systems helped humans to create mega-wealth?

Dar Wong is the Principal Consultant of APSRI. The expressions are solely his own. He can be reached at [email protected]