FLASH CRASH - HOPE IT REMAINS JUST A FLASH IN THE PAN!
By Ruma Dubey
The newsmaker today was undoubtedly Emkay Global Finance. The company is suddenly in the limelight but unfortunately, bad light.
In an otherwise lackluster day of trading, where it finally dawned upon investors and traders that all the hype about this ‘cabinet meeting’ could come to a naught in the Parliament, everyone seemed to looking around for the next trigger. And suddenly in the midst of lack of direction, Emkay Global punched in bulk trade orders, around 59 orders worth Rs.650 crore, which in turn triggered off the market filter on the NSE and eventually had to be shut down for a few minutes.
Quickly it was labeled as “Flash crash” and within seconds, it had dragged down the Nifty by over 15%. With no other reasons coming forth, it was a genuine ‘fat finger’ error - punching error or wrong pressing of orders on the trading terminals. The losses would not have been restricted to Emkay alone if the circuit breakers had not kicked in, the losses could have spread all over to institutions, traders and the market as a whole.
Earlier it was assumed that it was an algorithmic error but NSE was quick to state that the error was non-algorithmic. Well, sounds complicated but in simple parlance it means the error was not due to a mistake in the computerized automated method of trading but manual. These algorithmic orders are initiated without human intervention. In algorithmic trading, computers make elaborate decisions to initiate orders based on information that is received electronically, before human traders are capable of processing the information they observe.
But here, it is stated that Emkay entered the orders manually and thus was not an algorithmic malfunction. Actually speaking, when the algorithm which is entered is also first manual, so ultimately all errors are manual, isn’t it?
Flash crashes can wipe out institutions and the market as the losses could mount to billions within seconds. As a safety measure, SEBI has put in place a pre-trade order filter of 20% for stocks that are part of the Nifty and the Sensex. This means traders can place orders in such stocks at a price which is more or less than 20% vis-à-vis previous closing. But what today’s incidence has shown is that this band of 20% is too broad and needs to be narrowed. At the same time, there is no penalty on broking firms who do not put in pre-trade orders which will prevent errors for affecting the markets when they open for trading. If maybe SEBI imposes this as mandatory or imposes strong penal action then broking firms, especially those executing large institutional orders will fall in place.
If one may recollect, in April there was a similar ‘freak error’ where the Nifty fell 7% within seconds due to a wrong sell order executed. Though the mistake cost was placed at Rs.10 crore, this time the amount is huge and such freaks seem to be occurring too frequently.
The happening of today will not have ramifications on the overall market on Monday; the markets have already moved on. But to ensure that there is no bloodbath due to ‘fat fingers’ in the future, it is best to put in tighter and leaner filters; smaller profits are better than being wiped out totally! Every mishap is a learning and hopefully, we will see stricter norms to avoid such flash crashes. At this juncture, with moods swinging from despondency to exhilaration, such flashes are surely not required!