Learning to live with flash crash

The crash arrested some of the momentum which was building up in the stock market after the bullish announcements by the government in Delhi.

Written by Sandeep Singh | Published: October 12, 2012 12:43:46 am

Is it inevitable that trading at the speed of light in the stock markets will create the odd glitches which participants will have to live with? NSE is not the only global market where flash crash has occurred recently and is unlikely to be the last one. But when such a crash occurs especially when the markets are at significant cusps,the impact can be far more dramatic than just the numbers show,like the one on October 5.

The crash arrested some of the momentum which was building up in the stock market after the bullish announcements by the government in Delhi. But imagine the impact of such a crash on a day when an OFS (offer for sale) is playing out in the market,as it will soon do for the slew of disinvestment the government has lined up for in the second half of the year.

Both Sebi and the exchanges recognise that prevention is a highly tough call. It is like an earthquake,impossible to call but easier to minimise its damage. The measures which Sebi will like to bring in include setting a price band in the stocks that are part of the futures and options trade,a cap on the size of the order a broker can book from all his terminals,a limit on the order price when it is below the prevailing price of the stock and more checks at the brokers end. The NSE crash,by the way,led to a 900 points fall in the Nifty.

As of now there is no minimum/maximum price range for individual securities in the F&O category,though the operating ranges are kept at +/- 20 per cent. One option is to have a limit of variation in specific stocks and a curb on the operating range. There is also a view that market order should be a function of the liquidity and depth of the order book.

So exchanges can calculate these on a continuous basis ensuring that market orders do not build up beyond a specified percentage.

Sandeep is a Senior Assistant Editor based in Mumbai.

sandeep.singh@expressindia.com

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