The three-hour trading halt in the NSE’s cash and derivative segment raises many critical concerns that need to be addressed forthwith. Investors transacting on the NSE were left high and dry on Monday with their early morning trades failing to go through. This was because the NSE’s cash segment could not open normally in the morning due to “technical reasons” that the exchange says it is investigating. The derivative segment was also shut down immediately after as it is not possible to continue trading in derivatives while the cash segment is shut. After two false starts, trading resumed mid-day.
Trading halts are not uncommon in global stock exchanges. In July 2015, the NYSE had to suspend trading in all the stocks for almost two hours due to a configuration problem. Other exchanges such as the Nasdaq, Intercontinental Exchange and Chicago Mercantile Exchange too experienced partial or complete trading halts in the last decade. The over-reliance on technology for stock market operations globally makes such events imminent. Therefore the manner in which the exchanges handle these disruptions is important to retain investors’ trust. The NSE’s much touted technological prowess was nowhere in sight on Monday as the exchange struggled to sort out the bug in the cash segment. While it could be argued that the primary server was not entirely down thus dispensing with the need to activate the back-up or the disaster recovery servers, the exchange needs to have plans to handle minor malfunctions that affect one segment of trading as well. The other issue that is highlighted in this incident is the concentration of equity derivatives trading on one platform — NSE — even though the BSE also offers the facility. The BSE has insignificant presence in the equity derivative segment; almost the entire daily equity derivative turnover of ₹5 lakh crore is transacted on the NSE. This concentration of equity futures and options in just one stock exchange proved detrimental to traders who held open positions on the NSE on Monday morning. Presence of multiple pools for trading similar products has helped other global exchanges that faced similar issues in the past.
While the NSE did send circulars during the halt to keep members and other updated about the progress of repairs, they could have been a little more elaborate to ease investors’ concerns. The Securities and Exchange Board of India, too needs to play a larger role in such periods to update investors about the steps being taken by the regulator to ensure that normalcy is restored quickly. The regulator should now delve into the issue to unearth the cause of the trading halt and ensure that exchanges frame standard operating procedures to be followed in such events. These should include trading back-up, channels of communication and investor redress mechanisms.