Derivative traders on the National Stock Exchange (NSE) were left in a tizzy on Monday when within seconds of the opening bell, Nifty index futures surged 805 points, or over 5 per cent, without any similar rise in the underlying cash market.

The Nifty futures (current month expiry) hit a new lifetime high of 16,546 compared to the last session close of 15,741. And, the underlying Nifty index was trading below 15,800 levels.

Triggers stop-loss orders

This massive spike in Nifty futures, which is one of the world’s largest traded derivative contracts, caused severe hardship for many traders as stop-loss orders got triggered, brokers from Mumbai, Delhi and Bengaluru said. A stop-loss order is to limit a trader’s loss due to any unfavourable market movement. On Monday, these orders were triggered without any reason.

“For nearly 27 seconds after the NSE commenced trading at 9.15 a.m, there seemed to be some stoppage as many trade orders could not go through. After that, in a ‘flash’, Nifty futures touched a high of 16,546.” This is what caught most brokers and their clients off-guard, a regulatory official told BusinessLine.

A market stopgap of 27 seconds can hugely impact profits/ losses since equity trading, especially derivatives, is now a game of machines. Trades are done in microseconds. On any normal day, 2-5 crore trade orders, which in value terms could be several hundred crores, can be processed in 27 seconds, experts say. Most importantly, the trading heat or intensity is the maximum during the early hours.

At the market’s close on Monday, Nifty futures (current month) were last traded at 15,868. This was in line with the underlying Nifty, which closed at 15,834.

“This is not the first time that such a spike in index prices has put traders in a spot, but the NSE has a history. It is important to know who benefits from such flash spikes and how did it occur in the first place. Traders are losing confidence in the market,” said a securities lawyer.


NSE explains

In its response, the NSE said: “A dealer placed a manual buy order for Nifty near month futures in the first few seconds upon opening. Since the order was within the operating range it matched with existing sell orders in the book. Two trades got executed at a price within the trade operating range. After the above execution, the above mentioned order entered the order book at the limit price with the pending quantity. The dealer subsequently cancelled the order. Meanwhile, other orders from a few members were entered at a price which was outside the trade execution range but within operating range and were not executed since they were outside the trade execution range. These orders were subsequently cancelled.”

The NSE said it had sought explanations from members. “We would like to reiterate that NSE systems functioned normally and all orders were executed as per the prescribed operating and trade execution ranges,” it said.