Communication error at Emkay leads to Rs 650-crore selloff; Nifty crashes by 900 points
On a quiet Friday morning, a young trader at a Mumbai
brokerage made what could be the biggest mistake of his life - confusing the
value of a client's order with the number of shares. Instead of selling stocks
worth Rs 34 lakh, he punched in orders that amounted to a Rs 650-crore selloff.
Within seconds, the market went into a tailspin and his employer Emkay Global was left scrambling for
cash. It was a reminder that the stock market, often perceived as a barometer
for economic prosperity, could be amazingly vulnerable.
The bellwether Nifty crashed by 900 points (more than 15%) amid heavy volumes and the market shut down for 15 minutes, with arbitrageurs who cash in on the difference between the spot and futures markets taking a heavy hit. Friday's development may be raised at the meeting between Finance Minister P Chidambaram and the Sebi board.
Emkay, whose trading terminals have been frozen following the incident, will have to organise funds by Tuesday to resume business. The brokerage did not ask National Stock Exchange to cancel the trades, but bought back the shares at a higher price. In the bargain, it is set to have taken a blow of around Rs 80 crore, of which a portion was organised on Friday itself. The brokerage, which has a net worth of Rs 148 crore, has assured NSE that it was arranging funds and would meet its obligation early next week.
Emkay Global executed the trade on behalf of an institutional client for a so-called basket order for sale of Nifty shares such as ITC, Tata Motors and Reliance Industries, etc. "The intention was to sell Rs 34 lakh worth of shares in two tranches of Rs 17 lakh each. But the orders were executed inadvertently as "17 lakh Nifty to be converted into a basket". It made all the difference as the value of sale was replaced by the quantity to be sold... The dealer has not been sacked," said a person aware of the transaction.
But the market snapped its four-day winning streak and ended in the red at 5,747, down 0.7%. Emkay shares dropped 10% at Rs 31.10. Though the broker squared off the trade after the market plunged, it has opened itself to an investigation by NSE and probable action by Sebi, the capital markets regulator. "While the exchange systems functioned normally without any glitch, the above-abnormal trades caused market closure automatically due to the index circuit filter getting triggered," NSE claimed.
Trading, which stopped at 9:51 am, resumed at 10:05 am.
Since the 15% fall was the result of an erroneous order rather than marketwide panic, trading was not halted for the mandatory two hours, according to an NSE official.
Other stocks in the basket sale included ITC, Tata Motors, Reliance Industries, Hindustan Unilever, Infosys, ICICI Bank, HDFC and HDFC Bank. While Emkay stands to be the biggest loser, gainers would be those who picked up the blue-chip shares at the day's rock-bottom price. For instance, 8 lakh Tata Motor shares changed hands at Rs 242 apiece, 21% below the previous closing price. Similarly, 5 lakh HUL shares were purchased at Rs 446, or 21% below their previous close.
The bellwether Nifty crashed by 900 points (more than 15%) amid heavy volumes and the market shut down for 15 minutes, with arbitrageurs who cash in on the difference between the spot and futures markets taking a heavy hit. Friday's development may be raised at the meeting between Finance Minister P Chidambaram and the Sebi board.
Emkay, whose trading terminals have been frozen following the incident, will have to organise funds by Tuesday to resume business. The brokerage did not ask National Stock Exchange to cancel the trades, but bought back the shares at a higher price. In the bargain, it is set to have taken a blow of around Rs 80 crore, of which a portion was organised on Friday itself. The brokerage, which has a net worth of Rs 148 crore, has assured NSE that it was arranging funds and would meet its obligation early next week.
Emkay Global executed the trade on behalf of an institutional client for a so-called basket order for sale of Nifty shares such as ITC, Tata Motors and Reliance Industries, etc. "The intention was to sell Rs 34 lakh worth of shares in two tranches of Rs 17 lakh each. But the orders were executed inadvertently as "17 lakh Nifty to be converted into a basket". It made all the difference as the value of sale was replaced by the quantity to be sold... The dealer has not been sacked," said a person aware of the transaction.
But the market snapped its four-day winning streak and ended in the red at 5,747, down 0.7%. Emkay shares dropped 10% at Rs 31.10. Though the broker squared off the trade after the market plunged, it has opened itself to an investigation by NSE and probable action by Sebi, the capital markets regulator. "While the exchange systems functioned normally without any glitch, the above-abnormal trades caused market closure automatically due to the index circuit filter getting triggered," NSE claimed.
Trading, which stopped at 9:51 am, resumed at 10:05 am.
Since the 15% fall was the result of an erroneous order rather than marketwide panic, trading was not halted for the mandatory two hours, according to an NSE official.
Other stocks in the basket sale included ITC, Tata Motors, Reliance Industries, Hindustan Unilever, Infosys, ICICI Bank, HDFC and HDFC Bank. While Emkay stands to be the biggest loser, gainers would be those who picked up the blue-chip shares at the day's rock-bottom price. For instance, 8 lakh Tata Motor shares changed hands at Rs 242 apiece, 21% below the previous closing price. Similarly, 5 lakh HUL shares were purchased at Rs 446, or 21% below their previous close.
The market circuit filter got triggered due to entry of 59
erroneous orders that resulted in multiple trades for an aggregate value of
over Rs 650 crore," said the NSE release soon after the order.
Since the client was an institution, the exchange system accepted its order without any margin. Also, since the stocks in the basket were part of the futures and options segment, price limits did not apply to them and trading was halted only after the Nifty hit the lower circuit.
NSE, which will complete its investigation on Monday, is examining whether front-end checks and balances were in place at the brokerage.
How it all went wrong
9.15 am: Market opens normally, NSE's Nifty declines 0.47%
9.50 am: Nifty crashes over 10% triggering the circuit filter, trading automatically stops
9.51 am: Only existing orders executed, Nifty falls nearly 15.5%, or 900 points
10.00 am: NSE re-opens trade with pre-open session
10.05 am: Pre-open session ends; normal trading resumes
11.17 am: NSE issues first clarification saying circuit filter triggered on account of abnormal orders
11.52 am: NSE issues second clarification that said the entry of 59 erroneous orders resulted in multiple trades for an aggregate value of over Rs 650 crores
12.46 pm: NSE says it has stopped Emkay Global Financial Services from trading
Since the client was an institution, the exchange system accepted its order without any margin. Also, since the stocks in the basket were part of the futures and options segment, price limits did not apply to them and trading was halted only after the Nifty hit the lower circuit.
NSE, which will complete its investigation on Monday, is examining whether front-end checks and balances were in place at the brokerage.
How it all went wrong
9.15 am: Market opens normally, NSE's Nifty declines 0.47%
9.50 am: Nifty crashes over 10% triggering the circuit filter, trading automatically stops
9.51 am: Only existing orders executed, Nifty falls nearly 15.5%, or 900 points
10.00 am: NSE re-opens trade with pre-open session
10.05 am: Pre-open session ends; normal trading resumes
11.17 am: NSE issues first clarification saying circuit filter triggered on account of abnormal orders
11.52 am: NSE issues second clarification that said the entry of 59 erroneous orders resulted in multiple trades for an aggregate value of over Rs 650 crores
12.46 pm: NSE says it has stopped Emkay Global Financial Services from trading
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Credit : ET