No margin for error

The National Stock Exchange (NSE) has taken the right decision in making Emkay Global Financial Services bear the losses the broking firm incurred through erroneous orders punched in by one of its dealers. The NSE’s actions are in consonance with the Securities and Exchange Board of India’s (SEBI) rules, making the trading member liable for the orders put through an exchange by persons authorised by him, his employees and sub-brokers. Exceptions here arise only when the member can prove fraud or misrepresentation, that is, the trades being influenced by persons other than those mentioned above. Though the stock exchange trading rules also do provide for cancellation of trades in the event of ‘material mistake’, it is difficult to sustain that argument in the instant case.

The brokerage firm had, after all, punched in 59 trades in market bellwether scrips — that too, executed at 10 per cent or more below their ruling market prices. That makes it more a case of negligence and lack of internal control systems, rather than a ‘mistake’. Nor can the surveillance systems at the NSE be faulted, for the exchange did halt trading when the Nifty index fell more than its initial circuit limit of 10 per cent. Even otherwise, Indian exchanges have adhered to SEBI rules on collecting margins from members, which is one reason why there have been no payment defaults even in the toughest of times — the 2008 crash, for instance. The same cannot be said about the trading members. The latest episode, if anything, exposes inadequate online surveillance mechanisms at the member level. Trading software available with most brokers are actually capable of throwing up alerts about terminals that are punching in trades beyond prescribed price limits or those generating extraordinarily high volumes. All that needs to be done is to tighten these limits so that no member gets caught in situations similar to the one that caused the trading to be halted in the recent instance. It is unfortunate that, in their anxiety to generate trading volumes, such elementary precautions tend to get ignored.

Ultimately, trading members of exchanges need to realise that they have to incur the expenditure to put up robust surveillance and risk management systems to survive in a market where trades are executed at the speed of light. Even one manual trading error here can send all the algorithms operating in the market into an overdrive, as was seen in the Dow flash crash in 2010. The only way to make them realise this exigency is to make them bear the loss caused by such omission. And that is what NSE has, rightly, done in this case.

Keywords: Stock market and surveillance, Online surveillance mechanism

COMMENT NOW