NSE’s “technical glitch” puts a serious question on the preparedness of the stock exchange to deal with crises
On Monday, while Nifty, the main index of the National Stock Exchange (NSE) touched an all-time high level, its credibility and that of the processes being followed touched an all-time low. Trading at the NSE was halted for almost three hours for what NSE kept describing as a “technical glitch.”
This is not the first time that trading has been suspended at the exchange. On October 5, 2012, a fat finger error, which essentially means that punching of wrong orders by one stock broker, led to a sharp fall in index stocks due to which trading was halted. But that halt took place because the index-wise circuit filters were breached and as per norms trade needs to stop for a cooling off period. Monday’s incident is evidence of the fact that the exchange had not learnt its lesson from the earlier episode. As a result, the country’s largest stock exchange was shut for no less than three hours during which investors had no clue over what was happening.
What happened on Monday, puts a serious question on the preparedness of the stock exchange to deal with sudden outages over what are purportedly technical issues because of the volumes of transactions involved. The reaction from the exchange after the blow out exposed a bitter truth: that if trading is disrupted due to technical issues, there is no standard operating procedure (SOP) on how to deal quickly get things moving. By inference, investors are left to the mercy of Lady Luck at such times.
Pointed questions must be asked. For instance, what happened to the back-up servers and systems which NSE claimed to have put up in other cities so that in case of any trouble, those servers can be put to use for a day like this. The exchange needs to make this information public, to establish whether all those back-up systems were put to use to restart trading. An exchange which preaches transparency to others should be transparent itself, especially given the fact that it will soon be a public listed company.
There is another important question. Why was trading allowed to take place in the futures and options segments when trading in the underlying cash market was not taking place — it took the NSE a good 40 minutes before this trading was stopped. It is the movement of the cash market that determines what happens in the derivative segment and not vice versa. Allowing derivative trading without any cash trading is promoting highly speculative trading.
Importantly, who will be responsible for the losses which both retail investors and large hedge funds would have to bear because of this so-called technical glitch. Just to give an example, on Monday, Divi’s Laboratories, informed the exchanges that it had received intimation from USFDA that an important issue which USFDA had with the company was on the path of resolution. Essentially, it meant that the chances of removal of an import ban from one of its facilities had gone up. It is material development, and as per the listing agreement, a company is supposed to inform the stock exchange about it. As the company informed the stock exchanges, in a matter of few minutes the stock price of Divi’s Laboratories moved up 14 per cent on the Bombay stock exchange. However, because NSE was shut for trading, what happened to traders or a large hedge fund who had short a position in Divi’s Laboratories futures at NSE. They were not able to cover short positions and will incur a loss. They were forced to cover their positions once the stock had already moved up.
So, who will be held responsible for the loss? Will the investor protection fund money, which is lying with the stock exchange, be used to make good those losses? Going forward, will domestic and foreign investors, who invest in the Indian equity market, have to add one more risk — a kind of “stock exchange technology failure risk” — to the list of risks they have manage?
Then, comes the issue of communication. Except a statement that trading would resume after technical issues were sorted out, there was nothing else which the stock exchange told investors during the crisis. There is need for guidelines that in case trading is halted, the stock exchange will inform through its website and media on the reasons for the halt and the approximate time for the problem to get resolved. Vague references to a technical glitch are meaningless. The guidelines must also clearly state that when trading starts again, what will happen to the trades which have already taken place, will they be cancelled or honoured.
In the absence of such guidelines, rumours invariably circulate creating unnecessary panic in markets. If policy makers are serious that what happened on Monday is not repeated, a through probe should be launched by an outside agency to identify all outstanding matters. The NSE has a reputation for not being wholly transparent in its operations and especially when problems arise, the biggest case in point being its attempt to hide what happened in the co-location case. That the government has now stepped in after Monday’s chaos, is welcome.