Need greater risk awareness of tech at bourses: Deena Mehta

Deena Mehta, MD, Asit C Mehta Investments explains to CNBC-TV18 that the trading error by Emkay highlights the need for greater awareness regarding the risk involved in the use of technology across all levels of trading at the bourses to prevent the occurrence of such an incident again.

Below is an edited transcript of the analysis on CNBC-TV18.

Q: There was a trading error and Emkay made losses. But what happens to the investors who might have put in stop-losses assuming that if there was a slight correction their position could be squared off? Have those investors also lost money while some may have gained because they bought the stock at very cheap prices? Have some investors lost as well?

A: Yes, definitely. This problem is not restricted to one broker only. Everybody who had transacted in the stock at various stages will be impacted because of this fall. I think the problem is more with the market rather than with just one broker.

Q: Do you think the mood in the market today is downbeat because a lot of investors have lost money and hence are a little confused and scared? Will the cheer return once the market recovers and rallies?

A: Honestly, I don’t think that this mishap has to do with anything with the general fall in the market because today’s news was discounted on Thursday itself. And what has happened is not a very big problem because the exchanges have recourses such as the trade guarantee fund to tackle such problems.

The slump in the market is due to investors realising that the euphoric announcements of reforms by the Cabinet on Thursday will have to be debated in both the Houses of Parliament before they come law and are implemented. So, when this realisation sunk in the market corrected. Hence, I do not accord too much weight on market movement today.

Q: How will today's market-error impact brokers? Will the broker who punched-in the freak trade have to repay only the institutional clients or will other damages also be imposed? Are other terminals likely to face a similar problem?

A: No. I don't think so. This particular broker definitely has sold shares at a price much lower than the market price and when brokers say that their positions are squared off, that means those shares would be bought back from the market. Irrespective of how the entire matching of orders, it is done on the passive order book. That means the rate of an order which is already lying in the system is taken for purpose of matching.

So, passive order books are very important for the purpose of matching. I don’t see any widespread problem among the brokers because after all it is cash market where the turnover is hardly Rs 2,000 to Rs 3,000 crore.

_PAGEBREAK_

Q: Could the wrong parameters in a program caused the problems because this could not have been due to manual ordering in one stock?

A: No, this was a manual order. It was a batch of 39 scrips were put up for sale simultaneously. To handle batch orders, there are two levels of control. One is at the broker's end through a software called CTCL which interacts with the network at the exchange. The second level of control lies with the exchange.

It now appears that these systems work when the transactions are transmitted individually. But when the orders are sent in a basket, apparently the impact of the basket is not recorded by the computer system at the exchange. That is what seems to have gone wrong and I am sure that everyone will learn a lot of lessons from this.

I don't know if in India we are really conscious of the power of technology and the risks involved. So I think this sensitivity to risk will have to be further heightened and more checks will have to be placed on transactions at the basket level.

Q: There would be some limits on how much a particular dealer or a client or a particular terminal can trade. Do you think an outstanding of Rs 700 crore by a domestic brokerage or client has caused the problem?

A: No. The NSE system clearly indicates that it was an institutional client, as institutional clients have huge limits and this particular broker also is a big and active broker, very active on the institutional front. So I think that these kind of limits are quite normal. It is not something out of place.

Q: How are the markets expected to trend?

A: Sentiments can only take you up to a point after which positive company results will act as the real boost along with pieces of news which was released on Thursday that there was growth in Nifty stocks.

Though there is lot of steam in the market, it is very unfortunate that retail investors are exiting the rally. Every day, our retail books show the continuous sales by retail investors.

And because retail investors tend to buy late and exit early, they don't avail of the full benefit of the rally. So I feel that any dip in the market is a good time to stay invested in the market and I feel the best is yet to come.