WHAT A PUNCH Finger Licking: A Wrong No. Sends Nifty Crashing

Instead of selling stocks worth . 34 lakh, Emkay stock trader erroneously punches orders amounting to . 650 crore On a quiet Friday morning, a young trader at a Mumbai brokerage made what could be the biggest mistake of his life — confusing the value of a client's order with the number of shares. Instead of selling stocks worth . 34 lakh, he punched in orders that amounted to a . 650-crore selloff. Within seconds, the market went into a tailspin and his employer Emkay Global was left scrambling for cash. It was a reminder that the stock market, often perceived as a barometer for economic prosperity, could be amazingly vulnerable. The bellwether Nifty crashed by 900 points (more than 15%) amid heavy volumes and the market shut down for 15 minutes, with arbitrageurs, who cash in on the difference between the spot and futures markets, taking a heavy hit. Friday's development may be raised at the meeting between Finance Minister P Chidambaram and the Sebi board. Emkay, whose trading terminals have been frozen following the incident, will have to organise funds by Tuesday to resume business. The brokerage did notask National Stock Exchange to cancel the trades, but bought back the shares at a higher price. In the bargain, it is set to have taken a blow of around . 80 crore, of which a portion was organised on Friday itself. The brokerage, which has a net worth of . 148 crore, has assured NSE that it was arranging funds and would meet its obligation early next week. Emkay Global executed the trade on behalf of an institutional client for a socalled basket order for sale of Nifty shares such as ITC, Tata Motors and Reliance Industries, etc. "The intention was to sell . 34 lakh worth of shares in two tranches of . 17 lakh each. But the orders were executed inadvertently as "17 lakh Nifty to be converted into a basket". It made all the difference as the value of sale was replaced by the quantity to be sold… The dealer has not been sacked," said a person aware of the transaction. But the market snapped its four-day winning streak and ended in the red at 5,747, down 0.7%. Emkay shares dropped 10% to . 31.10. Though the broker squared off the trade after the market plunged, it has opened itself to an investigation by NSE and probable action by Sebi. "While the exchange systems functioned normally without any glitch, the above-abnormal trades caused market closure automatically due to the index circuit filter getting triggered," NSE claimed. Trading, which stopped at 9:51 am, resumed at 10:05 am. "The event," said UR Bhat, MD, Dalton Capital Advisors, "brings to bear control failures at multiple levels. With ITenabled systems allowing easier intervention and controls, theoretically such a situation should not have arisen."  HOW IT ALL WENT  WRONG  9.15 am  Market opens  normally, NSE's Nifty declines 0.47%  9.50 am  Nifty crashes  over 10% triggering the circuit filter, trading automatically stops  9.51 am  Only existing  orders executed, Nifty falls nearly 15.5%, or 900 points  10.00 am  NSE  re-opens trade with pre-open session  10.05 am  Pre-open  session ends; normal trading resumes  11.17 am  NSE issues first clarification saying circuit filter triggered on account of abnormal orders  11.52 am  NSE issues second clarification that said the entry of 59 erroneous orders resulted in multiple trades for an aggregate value of over 650 crores  12.46 pm  NSE says it has stopped Emkay Global Financial Services from tradingEmkay Biggest Loser, but Some Gain too  Since the 15% fall was the result of an erroneous order rather than marketwide panic, trading was not halted for the mandatory two hours, according to an NSE official.  Other stocks in the basket sale included ITC, Tata Motors, Reliance Industries,Hindustan Unilever,Infosys, ICICI Bank, HDFC and HDFC Bank. While Emkay stands to be the biggest loser, gainers would be those who picked up the blue-chip shares at the day's rock-bottom price. For instance, 8 lakh Tata Motor shares changed hands at Rs 242 apiece, 21% below the previous closing price. Similarly, 5 lakh HUL shares were purchased at Rs 446, or 21% below their previous close.  "The market circuit filter got triggered due to entry of 59 erroneous orders that resulted in multiple trades for an aggregate value of over Rs 650 crore,"saidtheNSE releasesoon after the order.  Since the client was an institution, the exchange system accepted its order without any margin. Also, since the stocks in the basket were part of the futures and options segment, price limits did not apply to them and trading was halted only after the Nifty hit the lower circuit.  NSE, which will complete its investigation on Monday, is examining whether front-end checks and balances were in place at the brokerage. "The mandated cooling off period is to allow market participants gather their wits," said Rajesh Baheti, MD, Crosseas Capital Services. "Clearly, Friday's event resulted from a punching error and since the futures of the shares concerned did not react, trading resumed much sooner. It was not a market-wide crisis."  However, despite matters having returned to normal post the small trading shutdown, questions from a few brokers went abegging. For instance, why did the broker place market orders (where share purchases or sales happen at the prevailing market price) instead of limit orders (where price for sale or purchase is specified) for a such a large order? Why was there no limit on the maximum order size or built-in risk management system that could prevent execution of an order beyond a particular size?