Erroneous orders from broker led to freak trade: NSE

In early morning trade freak trade at one of the brokerage houses halted trading at the NSE between 9.50 and 10.05am. Ravi Varanasi, Senior VP of NSE clarifies that it was not due to any technical glitch. Erroneous orders placed by the broker had resulted in the problem. He further informed that the NSE has disabled the member and the rest of the system has functioned normally. Therefore, other traders have not faced any difficulty in trading, he added.

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Here is the edited transcript of the interview on CNBC-TV18.

Q: NSE has a 10 percent circuit filter, how come it slipped 14 percent, is that a software bug, one of the veteran brokers came and explained that in a batch trade, the 10 percent circuit filters does not seem to be caught, is that a software bug that needs to be rectified?

A: First thing there is no system glitch or system issues at this particular instant. The broker has entered erroneous orders. Basically, these orders have been entered as market orders. Since the quantity is substantial and it was an erroneous quantity, it has executed across multiple price points and wiped out the order book. So the prices have gone down.

What happens is when a particular order is engaged and executions are happening, the moment substitute filter level is hit, no further orders are accepted by the system and orders in-flight have to be completed. Those executions will have to be completed to ensure these orders have been taken in the right quantities and they have been executed properly. Those order executions have to be completed because of those order executions, the index would have moved further down. That is it. No new orders would be accepted after the circuit filter is hit.

Q: What is the action NSE is taking, is the broker in question to make good the losses, would there be others who may have had margin calls because of unintentional trades stop losses getting triggered?

A: The member has already closed out his positions completely and the exchange has disabled the member. The member is in the process of arranging the funds and has already confirmed to the exchange that they would be able to make good all the funds they have to bring in to the exchange. The rest of the system has functioned normally, so no other member or investor would have been restricted as such.

Q: The members could have suffered losses you think even if their margin calls were not called, the unintended other brokers?

A: We do not think so.

Q: The member is adequately capitalized as NSE will not have any glitch in terms of recovering those goods?

A: Absolutely no. We have been already engaged with the member and the funds are being taken care of. We believe everything will be normal and we are continuously engaged with the member as such.

Q: Any action that can be taken to prevent something like this in the future, do you think there are any other back-up systems that can be installed, anything that can be done to prevent something like this in future?

A: We will engage with SEBI on this. Systems have been put in place. As I said, there is no problem with exchange systems. It is an error at the member end and in any case we will engage with the SEBI on this and then additional systems and processes which SEBI thinks should be brought in, will be brought bring in.

Effectively, I just wanted to reiterate that exchange systems have worked the way they are expected to perform.

Q: There is no question of any trades being reversed, people who have managed to buy those shares at 20 percent lower will remain and the broker member will have to bear the losses, right?

A: Yes. As things stand today, that is the situation and we are investigating the matter and we will get back to SEBI with the details.

Q: You have said that Emkay has clarified to you that it will arrange the necessary funds shortly, so does it mean they will get enabled on Monday or something or perhaps later today?

A: We will have to take it up with the regulator and what exactly the action should be will be decided. Once our investigation gets completed, we will take up the matter with the regulator and then we will be guided by them.

Q: So it is at the moment disabled till otherwise enabled for an indefinite period?

A: Yes.