While NSE want brokers to collect upfront margins from investors to avoid a flash crash like 5th October 2012, why is Sebi going soft on NSE for a obvious systemic failure on that day?
On 5th October 2012, the Nifty crashed by over 900 points when a dealer for stockbroker Emkay Global punched a wrong order. While National Stock Exchange (NSE) quickly blamed Emkay for the crash, but has not bothered to explain why its market-wide circuit filters failed to work. And now, NSE is seeking approval from the market regulator for its proposal under which brokers will have to collect margin money upfront from investors for trading in shares or the cash segment, similar to futures and options (F&O) trading.
At present, Exchanges collects upfront margins from brokers, but brokers do not ask clients for money in advance in the cash segment. In short, brokers are funding the clients, who settle the trades on next day using the ‘T+1’ settlement. The NSE move follows a show cause notice issued by Securities and Exchange Board of India (SEBI), after the 5 October 2012 flash crash.
NSE blamed 'abnormal' orders, worth $126 million, placed by the stockbroker in multiple trades of various stocks at low prices, for the crash. NSE claimed there were no technical glitches in its system and the crash was due to 'erroneous' trade orders worth over Rs650 crore by Emkay, which was disabled by the bourse for trading.
According to a report from Business Standard, in the notice (to SEBI), NSE had said mandating upfront margins even in the cash segment would have prevented the flash crash in October 2012. This is incorrect and an attempt to shift the blame.
Even if Emkay Global had collected 150% margin and then punched a wrong order, would the results be any different? NSE has continued to blame Emkay for the crash, but has still not bothered to explain why its market-wide circuit filters failed to work. Brokers are increasingly getting angrier at being held responsible for all technology problems and want a fair and open investigation.
In fact, when NSE index showed a sudden fall of nearly 900 points or over 15% within seconds, triggering the circuit filter (maximum permissible limit of movement in the index) at 0950 hours on 5 October 2012, the Exchange was supposed to halt trading for an hour. This is as mandated by SEBI circular on circuit filters. However, without the halt, NSE resumed trading at 1005 hours. This by not following SEBI circular, NSE has violated the norms on circuit filters.
NSE informed SEBI that the decision to reopen the cash market after a halt of 10 minutes was taken by the Exchange as F&O markets and other markets were functioning normally and the fall was apparently on account of freak orders from a particular member.
Last year, in August, the chief technology officer of the NSE preposterously told Business Standard that the Exchange had ‘attained nirvana’ in technology by being able to put through transactions at the speed of light. This when the Exchange had already had serious issues in three consecutive months—March (ONGC), April (Nifty futures algorithmic trading) and May (derivatives snag) and a fourth bigger one was about to happen in October.
As Moneylife has already said, the NSE as well as the Bombay Stock Exchange (BSE) seem to have ignored every check prescribed by SEBI. Trading was not halted in both bourses and across market segments; but the regulator’s only reaction is to launch an investigation.
The NSE has always successfully evaded a close scrutiny of all technology issues for over a decade. In its initial years, especially under the leadership of the late Dr RH Patil, the NSE was seen as an extension of the regulator and the government system. Not any more. Today, the NSE is driven by profits, pay and perquisites of senior executives, which are tied to a desperate need to maintain market share.
Inside story of the National Stock Exchange’s amazing success, leading to hubris, regulatory capture and algo scam
Fiercely independent and pro-consumer information on personal finance.
1-year online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
30-day online access to the magazine articles published during the subscription period.
Access is given for all articles published during the week (starting Monday) your subscription starts. For example, if you subscribe on Wednesday, you will have access to articles uploaded from Monday of that week.
This means access to other articles (outside the subscription period) are not included.
Articles outside the subscription period can be bought separately for a small price per article.
Fiercely independent and pro-consumer information on personal finance.
Complete access to Moneylife archives since inception ( till the date of your subscription )
operational head india
singapore media and channel group
this margin concept of stock broker is cheating even when the client opt out of this margin funding the broker desist from this concept and they lure the investors and cheat them and as such margin trading should be strictly controlled for which sebi nse bse never have intention to control infact they have formed an cartel and innocent investors is left in throught as such in india we donot have any protection for indian investors and it lies with the unscrupulous broking community and this is the ptiable status for this instead of spendig govt exchequer by establishing sebi nse bse these institution could be wounded and leave the market to broker even now the same status instead govt expenditure could be curtailed and this amount could be used for some welfare scheme instead paying hefty salary to staff of these unscrupulous govt servant is our surmise
noramlly the stock brokers cheat their customer with existing position of stocks they have they lure the investor by margin funding for which they cahrge upto 21% of interest and apart from this even if the client had not opted for this margin funding the brokers never divulge whether they have been removed from margin funding is not disclosed and as such there is again shady transaction going on but the sebi and nse bse are well aware of this fraud but they party to it but they say investor protection which is not so they proctector for fraudlent stock broker and as such investing and trading in stock market that to country like india where corruption in all walks of life even the govt organisations like sebi nse bse where there is lacking honesty integrity and dependability which our sole concern but with the present UPA II govt everything is lost is the pitable case and even justice is denied and officials of sebi and nse bse are highly corrupt is surmise we can say not single officer above corruption only GOD has to Punish and restore justice even if we take the case to supreme court the supreme court judges are threatened by these unscrupulous brokers and even the officials of sebi and nse bse inorder to save their skin they put the blame on others and as such there is totally collapse of justice and morale everythig is lost