The National Stock Exchange (NSE), which is the world’s largest derivatives exchange in terms of number of contracts traded, experienced a technical glitch on February 24 that brought trading to a halt for hours. Below is an attempt to answer all the important questions on a technical glitch and how it affects investors and the trades.
What is a technical glitch?
Simply put, a technical glitch could be any issue with a stock exchange’s hardware or software or even its connectivity links with the brokers that could affect normal trading activities. This assumes significance as trading in stocks happens in a completely electronic manner and a glitch can potentially affect millions of investors and billions in terms of investor wealth.There are many reasons for a technical glitch. For example, a stock exchange might have updated its systems and suddenly it could face some compatibility issues at the broker end. A new security patch could have issues with the server thereby affecting the trading systems. At times, migrating to a new trading software could also lead to a glitch.Then, there are the hardware and connectivity issues as well. The vast network of brokers is linked to the exchange through servers and satellite links and any kind of malfunction in the links could also cause a glitch. In today’s world, the bedrock of any exchange is its technology aspect and one needs to keep in mind that no business is insulated from such risks.
What caused the technical glitch today?
According to the NSE, the glitch has been caused due to some issues with two telecom service providers.“NSE has multiple telecom links with two service providers to ensure redundancy and we have received communication from both the telecom service providers that there are issues with their links due to which there is an impact on NSE system. We are working on restoring the systems as soon as possible. In view of the above all the segments have been closed at 11.40 and will be restored as soon as issue is resolved,” NSE said ina statement.Market participants and investors have questioned the duration of the trading halt especially when it is mandatory for exchanges to have standard operating procedures to handle such situations.
Do exchanges have any backup plan for such scenarios?
Ideally, there shouldn’t be a long trading halt if there is a technical glitch. The Indian regulatory framework has built-in clauses related to business continuity plans and disaster recovery mechanisms for stock exchanges.Both, BSE and NSE have disaster recovery sites, which should be triggered automatically if there is any issue with the main site or servers. Incidentally, rules by capital market regulator SEBI stipulate that every quarter, stock exchanges should manage live trading for one day from the disaster recovery sites to check for any possible shortcomings. The exchanges regularly do mock trading as well from the disaster recovery sites.So ideally trading should resume soon after any glitch affects the main servers or the connectivity links between the exchange’s primary servers and the brokers.
How do such glitches impact investors?
When trading comes to a halt due to a technical glitch, investors get affected as they are not able to buy or sell shares. If an order has been executed before a glitch triggers a trading halt, the exchange and the clearing corporation is bound to honour the trade. The tricky part is the millions of unexecuted orders that are in abeyance in the exchange system at the time of the glitch. Investors could lose money in a scenario wherein stock prices plunge the moment trading resumes. More importantly, stop-losses could get triggered in such a scenario as well. There have been instances in the past when the pending orders have been cancelled before trading is resumed. So, one will have to wait and watch how the pending orders are treated on Wednesday.
What is SEBI’s role in such a situation?
SEBI is the regulator of the Indian capital markets and hence has a big role in ensuring that such glitches do not happen. It is a standard practice that SEBI seeks a status report from the exchange after any such technical glitch. In the past, SEBI has also set up committees with a specific mandate to lay down the standard operating procedures for such situations. To be fair, while no business is insulated from such glitches, the regulator has an important role to make sure that such glitches are far and few in the Indian capital markets.
Have there been technical glitches in the past in India?
On an average, the last few years have seen at least one glitch happening every year. Technical glitches were witnessed in July 2017, May 2018, September 2019 and June 2020. To be fair, trading was not halted every time a glitch happened but it did impact investors as, at times, the prices were not getting updated properly, which, in turn, affected the order flow and also the price at which the orders were getting executed.
Are such technical glitches common globally as well?
Yes. Most of the leading exchanges worldwide have experienced such glitches that have affected trading activities. Nasdaq, which is the world’s second-largest bourse in terms of market capitalisation, saw a glitch in May 2012 during Facebook’s public issue that left many investors clueless on whether their orders were executed. It is estimated that investors lost around $500 million due to that glitch. In March 2013, the Securities and Exchange Commission (SEC) approved a plan submitted by Nasdaq in which the exchange agreed to offer investors a total compensation of $62 million.Interestingly, another technical glitch in August 2013 brought trading on Nasdaq to a complete halt for three hours. The Chicago Board Options Exchange opened three hours late on April 25, 2013 again due to a technical glitch.In October 2020, Tokyo Stock Exchange, which is the world’s third-largest bourse, experienced a glitch that affected trading activities. The London Stock Exchange saw one of its longest trading halts in 2019 due to a technical glitch. The year 2020 also saw Germany's trading platform Xetra witnessing glitches in April and July.