Chaos reigned at the National Stock Exchange (NSE) on Monday morning after a major technical snag forced suspension of equity trading for nearly three hours, evidently following a spike in derivative trading volumes as investors unwound their P-Note positions.

The embarrassing shutdown came barely a day after the G20 meeting lauded India’s financial derivative reforms.

The stock exchange gave no reason for the disruption, but brokers said the NSE’s cash segment developed a snag as the order book collapsed due to flooding of trades. After this, even trading on the derivative segment had to be suspended due to an avalanche of trades worth around ₹80,000 crore by 9.55 am. Of this, single stock futures accounted for trades worth ₹7,500 crore. Such volumes are typically spread out over the entire day.

The NSE made two unsuccessful attempts to restart trading, which finally resumed at 12:30 pm. “The NSE deeply apologises for the glitch. The matter is being examined by the internal technical team and external vendors, to analyse and identify the cause which led to the issue and to suggest solutions to prevent recurrence,” an NSE statement said. Market regulator SEBI asked the stock exchange for a report.

Last week, SEBI banned fresh issuance of P-Notes in the derivatives segment unless they were for hedging purpose, and asked foreign portfolio investors (FPI) to unwind their positions. FPIs say the unwinding accelerated because SEBI’s definition of hedging is too narrow for them to hold P-notes.

Brokers said the order book of the exchange collapsed even in the pre-opening session. “Order matching was stuck as sell orders were quoting at lower price while buyers were quoting higher,” a Mumbai broker said. “The abnormal action could be due to SEBI’s ban on P-Notes,” said Rishi Kohli, CEO, ProAlpha Capital.

After the glitch was resolved, the market witnessed a sharp rally in beaten-down stocks from the IT, Pharma and PSU Banking sectors, sending key benchmark indices to new highs. Market players see this as evidence of short covering of P-note positions in single stock futures. The Nifty index closed at a new high of 9771; the Sensex was last traded at 31,715.

Short-covering causes spike

“The spike in most IT, banking and pharma stocks was only due to short covering in single stock futures due to the SEBI circular on P-Notes,” said Sudip Bandyopadhyay, promoter, Inditrade Capital. “ Prima-facie , it seems the NSE system breakdown could be due to unusually heavy volumes in the first few minutes of trade commencement.”

While the NSE witnessed more than ₹3 lakh crore worth of volumes in the derivative segment, the cash segment recorded trades worth over ₹6,000 crore, against the typical ₹25,000-30,000 crore worth of trades daily.

The BSE’s cash segment volumes nearly doubled to over ₹9,000 crore.