Nifty Plunges On Glitch Spooks Indian Equity Markets Traders

Nifty, the National Stock Exchange index suddenly sank by over 900 points in a matter of minutes to a session low of 4,888.20 points, 15.5% below Thursday’s close, after Emkay Global Financial Services placed dozens of erroneous orders worth more than $125 million, reported Reuters. Trading in Nifty was stopped at 9:49 a.m. in Mumbai for 15 minutes.

The National Stock Exchange of India said 59 erroneous orders prompted a plunge in equities that briefly erased about $58 billion in value, underscoring the growing global concern about the integrity of financial markets. The sudden collapse shook nerves of Share Market traders and investors alike.

Analysts had already expected a session of falls after the impact on Equity Markets from India’s latest reform measures, targeting the insurance and pension sectors, was expected to fade. Traders expressed concerns the financial measures announced on Thursday would face an uncertain fate in parliament. The 50-share Nifty fell 0.7%, or 40.65 points, to end at 5746.95 points, having hit its highest Intraday level since April 28 2011 shortly after trading resumed after the halt.

The drop in the Nifty comes after a powerful run, with the index gaining 0.8% for a fifth consecutive weekly gain. The BSE-Sensex fell 0.63%, of 119.69 points, to end at 18,938.46 points after earlier in the session hitting its highest Intraday level since May 2 2011. BSE Sensex added 0.94% for the week. Mortgage lender HDFC dropped 5% after Carlyle Group sold a 3.7% stake for $841 million at a 3.5% discount to Thursday’s closing share prices. 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.

Nifty Plunge a Technical Glitch or Systemic failure:
The NSE’s trading limits for the Nifty range from 10% to 20%. 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% of the Nifty’s closing level of 5703.3 on Sept. 28, is meant to halt trading on any day in the quarter through December 31, according to a circular on the NSE’s website. 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. This is a system failure.

Blaming a broker does not absolve the exchange of the lapse on their system’s part, reported Bloomberg. The NSE, the nation’s largest bourse, controls more than 90% of India’s $28 billion equity derivatives market and handles 75% of the stock trades. The Stock Market 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. The Nifty crash definitely hurts as there have been a lot of foreign flows in the last two months and any erroneous order would impact investor confidence. Competition among Indian bourses is poised to intensify with a third bourse, MCX-SX – MCX Stock Exchange, planning to start trading equities around Diwali, the Hindu festival of lights, which falls in November.