India’s stock regulator issued new guidelines aimed at preventing flawed orders and uncontrolled trades after a brokerage mistake wiped 16 percent off the S&P CNX Nifty Index in eight seconds in October.
Any order exceeding 100 million rupees ($1.8 million) in value shouldn’t be accepted by stock exchanges for execution in the normal market, the Securities and Exchange Board of India said in a statement posted on its website yesterday. The restriction applies to orders for stocks, exchange-traded funds, index futures and equity futures.
The changes come after Emkay Global Financial Services Ltd. (EMKAY) entered 6.5 billion rupees of orders on behalf of an institutional client on Oct. 5, spurring a plunge in the Nifty (NIFTY) index that it later rebounded from. Trading in the 50-stock gauge and some companies stopped for 15 minutes that day in Mumbai, and Finance Minister Palaniappan Chidambaram said the government would investigate the tumble. Bank of New York Mellon Corp.’s index of Indian American depositary receipts fell 1.3 percent by 1:34 p.m. in New York.
“The recent incidents of erroneous orders have brought to fore certain areas that require additional risk control measures to mitigate disruption of trading,” the regulator said in the statement.
The Nifty slump came about two months after market maker Knight Capital Group Inc. (KCG:US) bombarded U.S. exchanges with mistaken orders in the first few minutes of trading, while high-frequency orders worsened the so-called flash crash of May 2010, which briefly wiped $862 billion from American stocks. A surge in trades of about 12 Australian equities two weeks after the Nifty incident spurred inquiries from that nation’s market regulator.
Under the new guidelines, which will be implemented in phases, stock brokers must also put in place a system to ensure that the total value of all unexecuted orders placed from their terminals is below a threshold limit. Stock exchanges can levy penalties against brokers who fail to implement the checks, according to the statement.
The regulator tightened the initial price threshold of so- called “dynamic price bands,” which prevent orders that are placed beyond the price limits set by the exchanges from being accepted. The ranges will be set at 10 percent of the previous closing price for stock and index futures and equities for which derivatives products are available. Exchanges can relax the price bands in increments of 5 percent in the case of a market event, according to yesterday’s statement.
“It could be good for investor confidence if it means the risk of another flash crash is reduced,” Michael Gayed, chief investment strategist at Pension Partners LLC and fund manager at the ATAC Inflation Rotation Fund, which invests in emerging- market exchange-traded funds, said by phone in New York. “It’s more about having a smoother operating system through which money can flow in those shares. It’s more a net benefit than negative.”
Stock brokers will be put in so-called risk-reduction mode when 90 percent of their collateral available for adjustment against margins is used, the regulator said. All unexecuted orders will be canceled once that threshold is reached, and all new orders will be checked for sufficiency of margins.
Exchanges have a month to institute the new rules, and can set “more stringent norms based on their assessment,” according to the regulator.
The National Stock Exchange of India Ltd., the nation’s largest bourse, controls more than 90 percent of India’s $28 billion equity derivatives market and handles 75 percent of stock trades. The exchange began trading equities electronically in 1994, prompting the 137-year-old BSE, which runs the BSE India Sensitive Index (SENSEX), to follow suit.
The Nifty retreated 0.6 percent to 5,851.50 in Mumbai yesterday, a third day of declines.
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