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Trading glitch: NSE’s new offerings may run into SEBI hurdle

The regulator wants the exchange to expand its capacity to take orders as new services will put pressure on the market architecture and an interruption like the one on Wednesday could repeat.

February 26, 2021 / 08:19 PM IST
Representative image

Representative image

Chafed at the shutdown on Wednesday that caused huge losses to investors, the market regulator Securities and Exchange Board of India (SEBI) is likely to take a dim view of the launch of new products by the National Stock Exchange (NSE). The regulator may put on hold new product approvals sought by the bourse, India’s largest, until its trade capacity increases, said people familiar with the matter.

NSE shut down for nearly four hours on Wednesday, and drew a storm of protests from traders who derided it for lack of transparency. Operators of NSE blamed a telecom network glitch for the trading interruption.

“SEBI may put all new product approvals on hold until it increases the capacity to take trading orders because new products put pressure on the market architecture,” said a person who is intimately aware of the regulator’s plans. The regulator has limited options to tackle NSE’s shortcomings and a delay in permission for launch of new offerings will put pressure on the exchange to invest more on technology, according to this person.

SEBI and NSE declined to comment.

NSE experienced a similar shutdown in 2017— that interruption extended to five hours then— and has again come up short on a backup plan.

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The exchange now offers a raft of products and services such as equity market indices trading, equity derivatives, currency derivatives, commodity derivatives, fixed income and debt public issues. In 2019 it emerged as the largest derivatives exchange in the world based on the volume of contracts traded. NSE was also ranked as the second largest exchange in the world in respect of contracts traded in the stock futures and No. 1 in terms of contracts traded in index options and currency futures and options, according to its 2020 Annual Report.

Last year, NSE launched commodity futures on bullion and energy. It launched its first agricultural commodity futures contract in December 2020. In January, it unveiled derivatives on the Nifty financial services index. The exchange regularly approves new stocks in the futures and options category to increase volume.

“As an exchange, they (NSE) have not increased their capacity from a long time, and this increases the load on the exchange architecture. If the regulator continues to give new product approvals to exchanges, it creates pressure on exchange servers, especially on volatile days,” said another person who is aware of SEBI’s actions.

SEBI may also institute stringent norms on the order-to-trade ratio (a calculation used to define the relationship between orders or quotes and ompleted transactions) for trading. Algorithm-based trades, a popular tactic of institutional investors and proprietary traders, typically dominates trades on exchanges.

“As a liberal order-to-trade ratio increases the burden on exchange servers, this needs to be discouraged economically. If the regulator discourages an economically high order-to-trade ratio, this reduces pressure on the servers,” said a third person.

Replica index in the works?

SEBI may also create a replica Index of the NSE on alternative exchanges. This is aimed at protecting the interests of investors.

On Wednesday, if an interoperability facility had been available during the trading interruption on NSE, traders could have squared off their positions in individual cash and future stocks on the Bombay Stock Exchange (BSE) or Metropolitan Stock Exchange. But this interoperability facility is not feasible in indices, where most of the trade happens.

A fourth person familiar with SEBI’s thinking told Moneycontrol that the regulator is serious about reviving discussions to make a replica of the Bank Nifty and Nifty on other exchanges as the bank Nifty and Nifty have the highest derivative volume. “SEBI has been discussing replica indices in exchanges but the NSE has opposed this because of the exclusivity of these indices.”

All the four persons didn’t want to be named.

NSE operators resumed trading with extended timing from 3.30 pm to 5 pm on Wednesday. Angry brokers complained that the bourse re-opened to extended timing without informing them.
Tarun Sharma

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