Plug broker terminals to avoid trading errors: Deena Mehta

A couple of weeks back, Emkay suffered huge losses on account of faulty punching order. While Sebi is still looking at the case, suggestions have poured in on possible ways to prevent such erroneous trades.

Speaking to CNBC-TV18, Deena Mehta, MD, Asit C Mehta Investments suggested enhanced checks at brokers' terminal, formulation of a policy to annul such trades and speed compromise as steps to minimise unintended transactions. Here is an edited transcript. Q: We have had that terrible accident of a wrong trade being punched in by one broker leading to huge losses at the brokerage level for which trade had to be stopped. That day, the Nifty had fallen by 15 percent at one point in time. There have been suggestions on how to set this right. One of them coming in from Dr. JR Verma, the professor at IIM and a former SEBI member saying that a circuit filter at 8-9 percent be placed so that trading in a specific stock which hits minus 8 percent or plus 8 percent is paused and the exchange has a chance to find out what is the reason for that gain and if it is a trading error then the trades could be reversed. Is this a fairly decent way to stop erroneous trades?
A: I do not think so. We have seen many news which have triggered the fall by more than 8 or 9 percent. We know shares which have gone down by as much as 50 percent. With the speed with which transactions happen, it is really not possible that a share goes down by 8 percent. At the same time, it is not possible that it will stop trading. What happens is it is a sequential activity. After share price has been determined, it is to be discussed whether stoppage should be put or not.
I have explained that trades happen in microseconds. One thousand microseconds make 1 millisecond and 1,000 milliseconds make a second. So the speed with which the transactions are happening, I am not sure whether exactly at 8 or 9 percent trading will stop and at the same time it will trigger so many orders which are there. So why 8 or 9 percent, even at 7 percent it could trigger so many stop loss orders. There is no sanctity to this 8 or 9 percent. Just because we closed the market at 10 percent, that does not mean that at 8 or 9 percent we should put a trigger.
What is required is to accept that mistakes are going to happen and how do we minimize them. If they are like the one which happened to Emkay, then  can we stop people from making profit out of mistakes. So we need to do get a lot more stringent approval of the front-end softwares which are being used in a broker’s office. I think all these controls, instead of putting at the exchange level which adds to the load on the exchange system, should be put at the brokers’ terminals which would really help in preventing wrong orders from going into the system. After using technology at the brokers' offices, if mistakes still happen, then we would require a proper annulment policy in place.
Even New York and other exchanges have used annulments from time to time where things have really gone wrong. In the F&O, we have said we will not have limits because there is a one month, two month, three month contract which is open on those shares. So it does not make sense to have scrip level things. I think what you need is tighter control in broker offices. Q: How do you determine if a trade is fraudulent?
A: No, there is nothing like fraudulent trade. In case of Emkay, it was an unintended transaction. Market order to sell Nifty is not a faulty transaction, it was an unintended transaction. Two-three years back somebody had put ACC sell at Re 1, which triggered the index; and the market closed. And then it was reopened.
That is what is called a fault. But putting a big order at market price, I do not know whether you can call it faulty. Fault are things which are wrongly priced or something like that. So I think we need to distinguish between the two. So you need to caution the person who is putting the trade, prevent him from putting the trade. If those things are put in place, our problem will be solved by 80-90 percent. Then whatever 10 percent remains, for that you have a proper annulment policy. I think that is more relevant. Q: For that 90 percent you want the front-end of the brokers to be improved and warnings to ensure that the person does not put…
A: We need to be lot more tighter and not allow them to go very fast on things which are unusual which each broker can define over and above the general stoppages, like too much money, exceeding this amount or below this price and stuff like that, say like Rs 650 crore was a lot of money for a single order.
 If a broker gets only Rs 1-2 lakh order then he can put in the system, but any order more than Rs 5 lakh will require some approval or maker-checker or something like that. You may compromise some speed, but I think it will bring lot more sense and practicality into the system if we follow these things.