Flash Crash wipes $60 Billion off Indian Stock Exchange

on Oct 5, 2012
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Yet another “flash crash” caused havoc on a stock exchange as an error resulted in close to $60 billion being wiped out from the stock market value of India’s biggest companies and triggered an almost 16 percent slide in the country’s main index.

At 9.49 am trading in the S&P CNX Nifty (NIFTY) Index and a couple of additional individual companies was halted by the National Stock Exchange (NSE) of India for 15 minutes after the 50-stock benchmark fell from 5,772.50 to 4,888.20. According to Bloomberg, the volumes traded up till 1.27 pm were 163 percent higher compared to the 100-day average.

The crash was caused by 58 erroneous orders executed by the Mumbai-based brokerage Emkay Global that led to trades worth Rs6.5 billion (£77.7 million). According to Divya Lahiri, spokeswoman for the NSE, the orders were a result of human error and not a computer-based algorithm. Deven Choksey, managing director at KR Choksey, said for the Financial Times that only HFTs could execute basket trades such as the ones involved in the incident. He opined that today’s error should provoke Indian markets to take a step back and evaluate their system that tends to encourage high volume trading over holding positions.

!m[](/uploads/story/532/thumbs/pic1_inline.png)“This outcome is the result of the amount of rampant trading,” he said. “The larger issue is about how much trading we want to encourage in the markets: do we as a market want 98 per cent of our business as trading business? If we do, then these kinds of incidents will happen and we’ll have to bear the consequences – this is an error, but at the same time it has far-reaching implications.”

Emkay, the broker responsible for today’s fiasco, saw its shares tumble by 10 percent, the maximum allowed on the NSE, to Rs31.05. The managing director Prakash Kacholia couldn’t be reached for comment.
The NSE is one of the 20 largest stock exchanges in the world and is India’s main bourse, controlling more than 90 percent of the country’s equity derivatives market and facilitates 75 percent of the stock trades. The exchange has a market capitalization of around $1 trillion. The mishap comes shortly before domestic competition gets tougher with the entry of a third Indian bourse – the MCX Stock Exchange.

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Exchanges in emerging economies continue to struggle in finding the balance between traditional services expected from them like allowing companies to safely raise capital and at the same time facilitating traders who use cutting edge technology to chase after profits in the time range of milliseconds. As “circuit breakers” have not been sufficient to prevent flash crashes, the Securities and Exchange Board of India has a difficult task of determining what else can be done to prevent such errors from happening and to insure a normal trading process.
Markets in developed countries are also plagued by irregularities in trading due to erroneous orders. On Wednesday 3 October, the Nasdaq had to cancel dozens of trades in shares of Kraft Food Group (NASDAQ:KRFT) after their price skyrocketed 25 percent within a minute of the market’s opening. In the stretch of five seconds, sales in the stock of the company were bouncing back and forth between levels of seven dollars without hitting any prices in-between. A spokesman from the Nasdaq exchange said for the Wall Street Journal that the glitch was caused by “a broker error that impacted multiple stock exchanges. Nasdaq’s systems performed normally and the industry’s process for handling these issues worked as intended.”

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