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Oct 08, 2012 08:52 AM IST | Source:

Freak trade to cost Emkay Rs 51 cr; in talks with brokers

Brokerage house Emkay Global has suffered a loss of Rs 51 crore because of the faulty trades executed by one of its dealers on Friday, two people with knowledge of the matter told

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Santosh Nair

Brokerage house Emkay Global has suffered a loss of Rs 51 crore because of the faulty trades executed by one of its dealers on Friday, two people with knowledge of the matter told
The dealer is reported to have mistakenly punched in a sell order for Nifty shares (stocks forming the Nifty index) many times more than the actual quantity that the institutional client wanted to sell. The brokerage ended up selling Rs 650 crore of Nifty shares, and then had to
undo the wrong trades by buying an equivalent amount of shares at higher prices.

Some brokers made a killing as they had placed buy orders for those shares at lower levels. The NSE said that it would not cancel the faulty trades.

"Efforts are on to convince the broker members (who bought the shares at lower levels) to return the profits to Emkay and help it reduce the loss," said a broker who is part of the negotiations. "It is not a wrong trading call on the market; it is a mistaken order. Members should not try to thrive on the misery of fellow members," said the broker.

Remains to be seen how many counterparties to Emkay's trades on Friday will be so magnanimous as to return the profit they can claim to be rightfully others.

"The ANMI (Association of National Exchanges Members of India) and BSE Brokers Forum will also make a request to the members," the broker said.

Emkay Global is a listed company and its shares crashed 10% after news of the faulty trade became public, with trading being frozen for want of buyers. At Friday's closing price of around Rs 31, the market capitalization of the company is Rs 76 crore, and its networth is Rs 148 crore. According to the brokerage's balance sheet for 2011-12, it has Rs 107 crore in liquid cash.

And while Emkay was able to reverse its positions without causing further volatility in the market, the crash raises many questions.

For instance, why did the Nifty index plunge 15% uninterrupted (over the previous close) on Friday when the system is supposed to shut down at the first 10% fall/rise. In the past, trading was halted on four occasions (2004, 2006, 2007, 2008) during a steep crash, and on each of these occasions, the circuit filter was triggered at a 10% drop. Trading is resumed after an hour in such cases, and if the index rises/falls another 5%, market is shut for the rest of the day.

On Friday, the Nifty hit a low of 4888.20, a 15% decline from the previous close, and then immediately rebounded to 5625 (down 3% from the previous close), at which point trading was frozen.

But even more intriguing, say brokers, is the buy orders at prices way below the market rates.

The intra-day lows for key index stocks like Reliance Industries (Rs 682), Hindustan Unilever (Rs 444), Bharti Airtel (Rs 215), and ICICI Bank (Rs 866.75), Tata Motors were 20% below Thursday's closing price, while those for stocks like Tata Steel, Tata Motors, Mahindra & Mahindra, Infosys and State Bank were 15-20% below their previous close.

These lows indicate that some players had put bids at those rates, and were lucky to get the shares because of the faulty trade which caused prices to crash steeply.

"Both Sebi and NSE have explicitly stated in the past that broker members can be penalized for alleged market manipulation if they put in orders way off the prevailing market price," said a broker on condition of anonymity. "And since there were no signs of a broad market panic, why were these players allowed to put such bids. Did they really think they could buy stocks like Reliance, HUL and Bharti 20% below the previous day," he said.

And in a departure from the usual norm, the exchange named the brokerage at the centre of the controversy. There have been freak trades in the recent past too, causing massive intra-day plunges (called flash crash in market parlance) in stocks like Reliance and Infosys, and even in the Nifty. And a faulty algorithm caused a surge in Sensex futures volumes on Muhurat Day last Diwali. But the names of the brokerages were not revealed. So does this mean that henceforth any brokerage guilty of an erroneous trade will be named publicly?



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