Troubled Galaxy destroyed dreams, Chapter:807
Palash Biswas
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Freak trade erases nearly $58 bn of market value in 2 minutes! Just think, the Indian incs government has arranged to pump your savings, PF, insurance and pension in this highly risky volatile system! It is alarming.The Securities and Exchange Board of India (Sebi) has begun initial probe into the 'flash crash' of National Stock Exchange (NSE) index Nifty, which fell nearly 900 points on Friday morning, halting the trade on the exchange for about 15 minutes.Stocks like Sesa Goa, State Bank of India, Axis Bank, Cipla, HCL Technologies, Bharti Airtel, Hindustan Unilever and Tata Motors quoted 6 – 17 per cent lower at the NSE.
* Nifty index dropped more than 900 points, or 15 percent
* Broker Emkay placed 59 erroneous orders, stock exchange
says
* Analysts concerned about solidity of trading systems
The National Stock Exchange of India said 59 erroneous orders prompted a plunge in equities that briefly erased about $58 billion in value, underscoring growing global concern about the integrity of financial markets.Although most of the loss is notional as the markets recovered, the shallow market depth and risk management policy are to be blamed. It is the National Stock Exchange which remains the epicentre of reform drive and policy making in free market India, mind you.A mere Rs 650 crore ($126 million) worth of sell order from Mumbai-based broking firm, Emkay Global Financial Services led to 16 per cent crash in the S&P CNX Nifty at the National Stock Exchange (NSE) in just two minutes. This incident has raised doubts over the risk management system and exposed the shallow depth of the country's stock market.After gaining around 488 points in past four sessions, the BSE benchmark index opened higher at 19115.89 after the government yesterday unleashed another round of reforms.India's Cabinet Thursday approved raising the limit on foreign ownership of local insurance firms to 49% from 26% and allowing overseas investors to own up to a 49% stake in domestic pension fund managers.These latest proposals need to be approved by Parliament, unlike the previous ones that required just Cabinet clearance.The series of pro-business steps within a short span of time underlines the government's urgency to boost economic growth that has slowed to less than 6% from more than 8% in recent years.
Meanwhile,demanding a complete probe into the charges, Kejriwal said, Vadra was provided interest free unsecured loan by real estate firm DLF with which he allegedly bought property in all worth Rs300 crore, albeit from DLF.Congress president Sonia Gandhi on Friday defended son-in-law Robert Vadra over allegations made by Arvind Kejriwal and Prashant Bhushan that he was favoured by realty major DLF and challenged Kejriwal to make formal complaint, reports said.
Industry chambers like Ficci and CII need to play a greater role in promoting transparent and ethical business practices to check corruption, said UN's Global Compact report.
"Industry associations need to play a much larger advisory role ... associations in India like FICCI and CII (need to) promote transparent and ethical business practices among the member companies in a more proactive manner," Chairman Administration Committee, Global Compact Network India (GCNI), A K Balyan said.
GCNI is an Indian arm of the UN Global Compact. Balyan, who is also CEO & MD of Petronet LNG LtdBSE -1.46 %, said that although various big public and private corporates like GAIL, Tata SteelBSE 0.21 % and InfosysBSE -1.84 % are taking steps at individual levels to curb corruption, there is a need for concerted effort to deal with the menace.
The GCNI study which has outlined the steps being taken by corporate houses to prevent corrupt in their respective companies was released by veteran journalist Kuldeep Nayyar yesterday.
The study noted that while government-owned GAIL made its entire billing process more transparent and user friendly, Neyveli Lignite CorporationBSE -1.90 % (NLC) implemented e-procurement system to prevent corruption and encourage transparency in their business dealings.
Tata Steel, it said was the first major company to formulate a written code of conduct, provides training to its new employees in countering corruption.
IT bellwether Infosys, which has been widely acknowledged for its corporate governance, follows whistleblower mechanism to address concerns relating to questionable accounting and auditing matters, it added.
The total market turnover on both the Bombay Stock Exchange and National Stock Exchange was Rs 1.91 lakh crore (Rs 1.91 trillion) on Friday
On the Bombay Stock Exchange, turnover in the cash segment amounted to Rs 5,442 crore while the derivatives segment registered a turnover of Rs 11,281 crore.
On the National Stock Exchange, turnover in the cash segment was Rs 19,927 crore while the turnover in the derivatives segment was Rs 1,54,661 crore.
The worst is over for the Indian economy but it will be another six months before the country shows signs of improvement and growth recovers to 6.5 per cent level, Bank of America Merrill Lynch has said in a report.
According to BofA-ML, lead indicators still point to six months of pain and it is not until the March quarter that growth is expected to recover to 6.5 per cent levels.
"We grow more confident of our call that while the worst is over, recovery will stretch for another 6 months," the report said.
While reforms are a medium-term positive, immediate revival will surely depend on lending rate cuts. A turn-around in loan demand is critical for recovery and high lending rates are still pulling down credit, the report said.
"High lending rates, are still pulling down credit, our other key lead indicator. Unless lending rates come off, FY13 growth will likely find it difficult to do our 5.6 per cent forecast, let alone the RBI's 6.5 per cent," BofA Merrill Lynch said.
It expects RBI to cut Cash Reserve Ratio by 50 basis points to pull down lending rates.
The report further noted that India is likely to bottom out at higher levels than Brazil and Russia.
There are, three "faint-and-flickering" rays of hope for a March turnaround. Firstly, trade credit - advances to traders - has bottomed out; secondly, north Indian reservoirs that water the winter wheat crop have recovered and thirdly, risk aversion is topping off.
In addition, the three key concerns for risk aversion - Greek exit from euro-zone, drought and policy paralysis in Delhi - are receding now.
The government has recently taken a number of reform initiatives like opening FDI to multi-brand to retail sector, aviation and broadcasting sector, hiking diesel prices, capping the number of subsidised LPG cylinders.
Moreover, the government has unleashed a second wave of reforms deciding to open the pension sector to foreign investment and raising the FDI cap in insurance to 49 per cent.
Indian shares snapped four-day winning streak Friday owing to profit booking after the indices crossed 19000 (on Sensex) and 5800 (on Nifty) levels yesterday. The BSE Sensex, which rallied 479 points in previous four sessions, fell 139.64 points to close at 18,918.51, weighed down by banking & financials, telecom, technology and healthcare stocks. The index had gained 79 points in early trade following Cabinet's approval to 49% FDI in insurance and pension.
Meanwhile, the NSE Nifty, which plunged 899 points intraday due to freak trade by a brokerage house , declined 40.65 points to end at 5,746.95. The index touched a low of 4,888.20 today due to faulty order punched by a dealer of Emkay Shares and Stock Brokers while the BSE Sensex fell more than 300 points. The trading was halted by the NSE for 15 minutes between 9:50 am to 10:05 am.
The Exchange said the member has been disabled from trading.
In late trade, the market pared losses following upmove in European markets. France's CAC, Germany's DAX and Britain's FTSE were up 0.5-0.8 percent after European Central Bank President Mario Draghi said the bank was ready to begin its bond buying programme.
Back home, the Indian rupee, which rose as much as 37 paise in morning trade, retreated completely in second half of trade. At 15:31 hours IST, the rupee was down by 12 paise to 51.86 against the US dollar.
Housing finance company HDFC lost 4.89 percent after Carlyle sold its entire stake in the company via multiple block deals.
Country's largest private sector lenders ICICI Bank and HDFC Bank were down around 1.5 percent.
Software services exporter Infosys, which will announce its second quarter earnings next Friday, declined 1.84 percent. Its rivals TCS and Wipro went down 0.86 percent and 2.41 percent, respectively.
The media is speculating on political equations only. India's second wave of economic reforms is facing a fractured opposition, building hopes that New Delhi may manage to push its proposals on insurance and pension through Parliament.Signals from political parties are conflicting on the federal Cabinet's decision Thursday to allow more overseas investments in insurance and open up the pensions sector to foreign investors. I am getting phone calls from everwhere with enquiries about the impact on us, the people.The second round of big-ticket reforms may find it extremely difficult to get the required political approval in the two houses of Parliament.But it would not stop the economic ethnic cleansing because economic policies have sustained continuity since 1991. No political equation is going to help you. Once insured, now you have to lose your premium too.LIC would be listed very soon. SBI remains the prime target.The reforms may be late to be implements as in the case of GST and DTC, but the ruling hegemony would accomplish the agenda sooner or later.Whatever may come!However,there seems some stumbling blocks to be cleared very soon.To compound problems, the main Opposition party — the BJP — sounded quite vague on whether it would lend support to the pension bill. "We have a number of caveats," said BJP's Prakash Javdekar with a degree of ambiguity. "We shall consider the bills positively provided our demands are met."If the Congress has the BJP's support then both these bills can be easily carried without any numerical hitch and the Congress does not need numbers from any other political quarter. But given the changed political circumstances, with a scam-hit government trying to bulldoze its way through a negative political climate by getting on to the reform bandwagon, the BJP may think more than twice before coming around to bail the government out.
The Trinamool Congress and the left-leaning parties have strongly criticized the latest measures as well. But the Bharatiya Janata Party, the main opposition party, seemed to tread cautiously, fearing a strong stand against the steps could backfire as it had proposed some of these measures on previous occasions.That wasn't the case when New Delhi announced the first round of reforms last month, when it raised the subsidized price of diesel and allowed foreigners to hold stakes in multi-brand retail stores. While opposition parties held nationwide protests against the steps, which they said were against the poor and could cause job losses, the Trinamool Congress withdrew its support to Prime Minister Manmohan Singh's coalition government after he refused to roll back the measures.
"We have not been anti-reforms. In fact, we have taken reforms forward. We were the ones to introduce FDI (foreign direct investment) in insurance," said Prakash Javadekar, a spokesman for the BJP. "As far as the latest increase in the FDI limits in insurance and pension funds is concerned, we have yet to see the fine print."
BJP on Friday questioned the 'legal and political intentions' behind allowing 49% FDI in the insurance sector but remained non-committal about its stand in Parliament when the Bill regarding the economic reform comes up for passage.
"We have made it very clear that we are against FDI in multi-brand retail. As for yesterday's cabinet decision, the Standing Committee on Finance had opposed more than 26% FDI in insurance. BJP is opposed to the government's views," party vice-president Mukhtar Abbas Naqvi told reporters.
Asked what BJP's stand will be when the insurance bill comes up in Parliament, he said "we said FDI should be 26%. There is a question mark on the legal and political intentions behind this move of the government."
After opposing FDI in multi-brand retail, BJP is concerned that it may be creating the impression of being anti-reforms. Since BJP-led NDA, when it was in power, had taken the initiative to allow FDI in insurance and pensions, a section in the party feels it should not oppose it now.
However, Naqvi evaded all questions on what BJP's stand will be in Parliament on these issues.
Finance Minister P Chidambaram has said the government will reach out to the principal opposition to win its support.
A flurry of erroneous orders placed by an Indian broker sent the country's top stock market
tumbling briefly on Friday, raising renewed concerns about the
stability of trading systems after a series of global market
glitches.
Trading on the National Stock Exchange (NSE) was briefly
halted after the 59 trades worth more than $125 million were
placed, triggering a sudden drop of more than 900 points on the
Nifty index, the exchange said.
It said the orders, for an institutional client, were sent
from a single dealer terminal at Emkay Global Financial Services
.
Traders said the NSE's trading systems appeared to have held
up well, and the index ended the session down just 0.7 percent.
But Emkay's actions marked the another incident in a
glitch-filled year for India's share markets, fuelling concerns
about whether they are equipped to deal with potentially much
bigger incidents of the type if not the magnitude of the Wall
Street "flash-crash" of May 2010.
"Frequent halts of trading have created a lot of confusion
in the minds of investors, impacting overall sentiment in the
market," said Hiten Gala, a senior manager at brokerage
Sharekhan.
Emkay, a financial services firm founded 17 years ago,
closed out all the positions from the misplaced trades, the NSE
said, adding it had been suspended from trading.
Indian market regulator SEBI was looking into Emkay's
misplaced trades, a senior official told Reuters. He declined to
be named because the matter has not been officially announced.
Shares in the firm, which did not respond to multiple
requests for comment, fell by the daily limit of 10 percent.
"These non-algo (algorithmic) market orders have been
entered for an erroneous quantity which resulted in executing
trades at multiple price points across the entire order book,
thereby causing the circuit filter to be triggered," the NSE
said in an earlier statement.
The NSE gave no further details of the trades and Emkay did
not disclose the nature of the error.
Traders said they suspect it involved wrong orders for
basket trades involving an index or a series of stocks, as a
number of shares appeared to have been impacted.
NEW COMPETITOR
The glitch halted traded on the NSE, whose $731 billion
market value exceeds that of Bombay Stock Exchange's Sensex
index, for around 15 minutes. NSE futures and options
markets traded as normal and the BSE was uninterrupted.
Some financial stocks fell sharply before trading was
halted, including State Bank of India and mortgage
lender HDFC.
Emkay's trading misfire came after a sudden drop in Nifty
futures in April sparked speculation of an erroneous trade, and
a poorly conducted share sale of state-run Oil and Natural Gas
Corp in March that analysts blamed in part on the two
stock exchanges.
The NSE has strongly defended its trading systems in both
incidents, and said on Friday the exchange's trading mechanism
"functioned normally without any glitch," sending four separate
statements through the day.
But analysts expressed surprise at why multiple bad orders
had been allowed to go through, and said the NSE would need to
provide more details and reassure markets about the reliability
of its trading systems.
"Whether this was a systematic risk and systematic technical
snag, it needs to be addressed by the exchanges. Such a mishap
should not happen," said KK Mittal, head of portfolio management
at Global Capital.
Confidence in India's two established exchanges is an
especially sensitive topic for bourse officials, given the
impending launch of a new stock exchange, MCX-SX, next month.
MCX-SX promoter Financial Technologies is the
leading provider of front-end trading technology, commanding
over 80 percent market share among NSE and BSE terminals.
The NSE spent an estimated 1.16 billion rupees ($22.37
million) maintaining and upgrading its technology last year,
according to data from ICICI Securities, representing about 8-9
percent of its annual revenue.
India is not along in suffering trading glitches.
Beyond the flash crash of 2010, U.S. trading firm Knight
Capital Group Inc suffered a technology breakdown that
roiled U.S. markets in August and Facebook's $16 billion
IPO in May was marred by glitches.
Trading in the S&P CNX Nifty (NIFTY) Index and some individual companies stopped at 9:49 a.m. in Mumbai for 15 minutes after the 50-stock gauge tumbled as much as 16 percent. The volume of stocks in the benchmark index that were traded today almost doubled from the 100-day average, according to data compiled by Bloomberg. An index of Indian stocks traded in New York slipped as much as 0.9 percent. On Friday, in the first hour of the trading session, NSE's key benchmark index Nifty fell from 5,773 to touch a low of 4,888 briefly wiping out an estimated $58 billion worth of equity value on the exchange. This happened as the brokerage, Emkay, that wanted to place a basket sell order for Rs 65 crore for an institutional client, instead punched in an order worth Rs 650 crore. The order got executed in 59 trades at a lower price pulling the benchmark index down. However, while the incident was being described as 'flash crash' it cannot be called so as it did not involve high frequency or algorithmic trading on part of the broker.
Stock exchange sources said, brokers mostly follow a formula based trading method while dealing for institutional clients and there are no limits set for big institutions which is why the Rs 650 crore order went through in the system.
However, the question being raised by some experts is what risk management do exchanges follow to keep a check on orders that distort the market price in an unprecedented manner, such as those by Emkay. The exchange though is defending itself.
Regulators around the world are probing market structures and electronic trading after a series of malfunctions. In May 2010, high-frequency orders worsened the so-called flash crash, which briefly wiped $862 billion from U.S. stocks. The Nasdaq Stock Market in May this year was overwhelmed by order cancellations and trade confirmations were delayed on the first day of trading in Facebook Inc. (FB), the largest initial public offering of 2012.
"India has joined the big league with this trading disaster," A.S. Thiyaga Rajan, a senior managing director at Aquarius Investment Advisors Pte., which manages about $400 million, said by phone from Singapore. "It's very surprising so many erroneous orders went through. Exchanges and regulators must be one step ahead as systems and technologies upgrade."
Emkay Orders
Orders entered by Emkay Global Financial Services Ltd. (EMKAY) for a client that led to trades valued at 6.5 billion rupees ($126 million) caused the problem, NSE spokeswoman Divya Malik Lahiri said by phone from New Delhi.
Circuit breaker limits enforced by the NSE get activated "after existing orders are executed," Ravi Varanasi, head of business development at the exchange in Mumbai, said by phone. "We are investigating the reason behind the wrong orders and how checks and balances at the member's end failed."
The NSE's trading limits for the Nifty range from 10 percent to 20 percent. The percentages are translated into absolute points of the index movement at the end of every quarter and applied for the next three months. A rise or decline of 570 points, equal to 10 percent of the Nifty's closing level of 5703.3 on Sept. 28, is meant to halt trading on any day in the quarter through Dec. 31, according to a circular on the NSE's website.
'System Failure'
"Even if there was order backlog, the index couldn't have slumped 900 points before halting when the circuit filter was set for a 570-point fall," Arun Kejriwal, director at Kejriwal Research & Investment Services Pvt., said by phone. "This is a system failure. Blaming a broker does not absolve the exchange of the lapse on their system's part."
Emkay Global's Managing Director Prakash Kacholia didn't answer his mobile phone. The broker's shares plunged by the 10 percent daily limit to 31.1 rupees.
The Nifty slipped 0.7 percent to 5,746.95 at the 3:30 p.m. close. Reliance Industries Ltd. (RIL), owner of the world's largest refining complex, rose 0.6 percent at 857.8 rupees, rebounding from a 20 percent plunge, while Housing Development Finance Corp. (HDFC), the country's biggest mortgage lender, lost 5 percent to 749.95 rupees after also falling 20 percent.
The NSE, the nation's largest bourse, controls more than 90 percent of India's $28 billion equity derivatives market and handles 75 percent of the stock trades. The halt, the biggest such problem in more than two years, comes as a burst of policy reforms by Prime Minister Manmohan Singh has propelled Indian stocks to a 17-month high. Foreign investors have plowed a net $16.5 billion into local shares this year, the most among 10 Asian markets tracked by Bloomberg, excluding China.
'Definitely Hurts'
An index of Indian stocks traded in New York fell the most since Sept. 25, after rising over the previous two days. The Bank of New York Mellon India ADR Index dropped 0.5 percent to 1,079 by 10:25 a.m. American depositary receipts of Infosys Ltd. (INFY), India's second-largest software exporter, declined for the first time in seven days, losing 0.7 percent to $49.31.
"The crash definitely hurts as there has been a lot of foreign flows in the last two months and any erroneous order would impact investor confidence," Daphne Roth, head of Asian equity research at ABN Amro Private Banking in Singapore, which oversees about $207 billion, said by e-mail. "Investors would still ultimately look to future reforms, not just related to the bourse but also to the economy."
Combined daily volumes on the nation's two biggest bourses averaged 989 million shares last month, 27 percent more than in August, data compiled by Bloomberg show. Trading last year in the Nifty, at 35.5 billion shares, was the lowest in four years.
Broker Orders
"It's not something that India needed at this stage when volumes are just beginning to recover," Aquarius' Rajan said.
In a separate statement, the NSE said it had "disabled" Emkay Global and closed out the broker's outstanding positions. N. Hariharan, a spokesman at the Securities & Exchange Board of India, the market regulator, was not available for comment.
The NSE, founded in 1992, began trading equities electronically in 1994, spurring the 137-year-old BSE, which runs the BSE India Sensitive Index, to follow suit.
Trading at both exchanges takes place through an open electronic limit order book, where order matching is undertaken by the trading computer.
Order Driven
The entire process is order-driven, meaning market orders placed by investors are automatically matched with the best limit orders and buyers and sellers remain anonymous. The order- driven market brings more transparency by displaying all buy and sell orders in the trading system, though there is no guarantee that orders will be executed because of the absence of market makers.
All orders must to be placed through brokers, many of which provide online trading facilities to retail customers. Institutional investors can gain direct market access through trading terminals provided by brokers for placing orders directly into the stock market trading system.
Competition among Indian bourses is poised to intensify with a third bourse, the MCX Stock Exchange, planning to start trading equities around Diwali, the Hindu festival of lights, which falls in November.
"With another exchange set to be operational in about a month investors would have an alternative," Kejriwal of Kejriwal Research said.
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