Bourses must look at practicalities of trades: Deena Mehta

Deena Mehta of Asit C Mehta says stock exchanges need to take practical cognizance of trades and rise above the technicalities of law. She says the exchange should have been closed for atleast two hours instead of half-an-hour and it should have called the concerned parties and a solution may have come out.

Below is the transcript of Deena Mehta's interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.

Sonia: Can you tell us what the impact would be of the SEBI orders since you have studied it in details?

A: The SEBI order is talking about two things. One is that the person against whom the orders were placed, one side was Emkay Global and the parties opposite, they did not have adequate margins for those trades to go through. So what appears is that orders, which are put as hidden orders in the system not to be displayed to the market, those orders are not getting counted for initial margin purpose. So as a result of that ideally, they could have done just one-tenth of the trade which they did. So the impact would have been much less than what happened. That was first finding that despite the inadequate margins, the trade went through.

The second finding was that the market should have been closed for two hours. Instead of that it was closed only for half an hour. So that is a second thing. Had it closed for two hours maybe some practical solution could have been found by the exchange by opening a dialogue and in fact the derivatives market was not closed at all and in fact both the exchanges should have closed the market but what SEBI order says is that the other exchange was not told to close the market. So it kept opened. These are two things, which have come out of SEBI order.

Latha: That is what I was coming to. Should not the SEBI order - I would assume - have been a little more strict and it is a grievous mistake I would think. The orders should have been reversed, doesn’t the order speak about anything about it?

A: Reversal of order is a different exercise by itself. What calls more for is wisdom. Ultimately, I am sure no matter how many laws we put in place, always there will be a concept of fairness and greed and wrongly making money in the market and this is a classic case for no -- it was just a lottery for the other brokers who were there. We have to prevent such kind of unjust and wrong scheming kind of thing because you put in order at ridiculous prices in the system and you keep it. So that somebody blinks and then you go and get the shares. That is precisely what these people had done. If the market price is 10, how can you put an order at 25 paisa or 50 paisa. This is what they have done. So what is very important is that we need to rise above the technicalities of law and go into an arena where there has to be some practicality involved.

Had the market been closed for two hours, had the stock exchange approached those brokers saying that this is a wrongful gain, which you are having, you please reverse it or prevail upon them at least talk to them, had that exercise happened then I am sure that we would not have had this kind of calamity, which happened. It was good that Emkay Global paid the money, had Emkay Global not paid, exchange would have paid and ultimately exchange would have lost. So what is important is that the SEBI order needs to be going more on general law principles also. Principles of natural justice.

Latha: So you think that post the SEBI orders, if erroneous order were to come again nothing prevents or nothing forces the exchanges to act in system?

A: Exactly because just now what happened in Japan -- of course in Japan the orders did not get executed. Before execution only they managed to stall it and they crush the whole thing. In other exchanges, they have reversed the order. But of late what has happened is that if the guys are saying that we are professional, we want to uphold integrity, what will foreigners think if we go and reverse our trades, this happens in all the markets. So it is not as if we are going to be unique in doing this but you have to give assurance to the investors, as it is stock markets have a very bad name. The amount of financial savings which ought to be coming to stock markets are not coming and when we have incidents like this happening in stock market, people get scared.

Latha: Didn't you go and make your deposition to SEBI as leading member of another exchange?

A: in fact, immediately after this incident happened, I wrote an article which was widely published and it was widely read on the net -- even I wrote to SEBI chairman that you would need to intervene. There was one FICCI seminar last year in which also I asked SEBI chairman to do something about it but somehow this whole thing became such a taboo that nobody wanted to talk about it and do something about it. I feel that in such times, somebody needs to rise above the law and say, look, yes this is a problem, let us sit across the table.

Sonia: How long do you think it could take for the systems to become watertight in that sense?

A: Systems are in evolving process. Today, we saw problem over here, we can never say that the systems are 100 percent perfect. I am sure there will be something or the other which can go wrong.

Latha: You pointed out to a very specific technical violation of margins.

A: Yes, that would help quite a bit. I remember one case of ACC -- there was one broker whose sub-broker or a client put a trade at Re 1 at ACC and it triggered the system and the system went down and for two months that broker was asked not to trade. That incident has not helped us at all. Why do we allow people to put orders at that level?

Latha: When we spoke to you immediately after this Emkay order two years ago, you told us that the systems themselves cannot move that fast that there is a limit to the speed with which controls can come in?

A: Yes, I had explained it to you that there is a micro system and the speed at which the orders move and the speed at which the index is calculated, there is a difference in frequency. So if the index is calculated every minute but the orders are happening in microseconds then always orders will go first and then the index will be calculated and the stoppage, which is there is thereafter, maybe one minute gap but in one minute also, the speed with which the exchanges are now working -- huge amount of trades are going to happen. So always that gap will remain.

Latha: Therefore the exchange or the regulator has to step in with extra-constitutional rules?

A: Yes, extra-constitutional rules are required that is where wisdom prevails like in other exchanges. If you take Ahmedabad, Delhi, Bombay and all these exchanges - that affinity at the member level is quite different from what we see in NSE. How NSE has grown, it is a National Exchange, people don’t know each other whereas all other exchanges in India have grown in a manner where people know each other.

Sonia: If you look at what happened globally when that Tokyo issue itself, the head of the exchange resigned after that whole issue took place. So the accountability levels are very high across the board.

A: You cannot compare Japan with anybody in the world. The kind of morality and the peace and the calm with which Japanese operate -- if you look at that nuclear tsunami what happened and how people behaved and you look at what has happened in J&K and how people behaved. It is completely different. Japan is Japan.

Latha: The SEBI has directed an independent review to suggest more robust securities trading systems for NSE, I would assume that BSE would also want to have more robust trading systems, what would be one-two things?

A: As I said, these are evolving processes. One margining that they have said, they will try but still we need to have extra powers to take care practicalities involved, to take care of all this and if somebody is not following the rule for example, if NSE opened within half an hour at -- moment it closed, did somebody speak to them and said look you have to keep it close for two hours. Why nobody actively stopped them saying what is going on, do this.

Latha: I guess not stopping the F&O activity was the worst.

A: Exactly and the transaction happened in F&O only. So this whole thing - this is a post-mortem. So when we do post-mortem as of today I would say we have to be future looking. I am sure there is enough audit of system, enough things are being done at a market level, at a regulatory level, we need to have solution for these problems rather than just putting some more cautions in place saying don’t do this, don’t do that. We need to rise above it.