Outrage over outage

The long trading halt on the National Stock Exchange (NSE) on Wednesday points towards serious shortcomings on the part of the exchange in managing its technological infrastructure. While the market regulator has asked the exchange to carry out a detailed root-cause analysis of the halt and to explain why trade was not migrated to the disaster recovery (DR) site at the earliest, the investigation should be followed by stern action that will act as a deterrent to future lapses of this kind. The NSE, which accounts for 100 per cent of equity derivative trades and almost 90 per cent of cash trades in equity, halted trading around 11.40 am on Wednesday citing issues with telecom links as the reason. It has also stated that there was no impact on the trading system but the instability in telecom links impacted the online risk management system, due to which trading could not continue. With the trading halt extending till 3.30 pm, trading hours had to be extended until 5 pm on the BSE, NSE and MSEI.

While technical glitches are not uncommon on stock exchanges that handle gigantic volumes such as the NSE, it is to be expected that they possess back-up infrastructure to ensure that such trading halts do not prolong. The exchange says that it has multiple telecom links with two service providers to ensure redundancy and that all the links became unstable around the same time, impacting the risk management system. There are three question that arise. One, why was the trading not migrated to the DR site immediately; DRs, after all, exist to ensure there is no disruption in trading in such circumstances. Two, how did all the telecom links become unstable at the same time. Three, if there was no impact on the trading system, was the halt really necessary, given that risk management need not be done real-time; it could have been done towards the end of the day. The problem was compounded by the lackadaisical communication to investors; the intended extension of trading hours was revealed only when the regular trading session was about to end. With expiry of February derivative contracts scheduled the next day, those holding derivative positions underwent an extremely traumatic period caused by the uncertainty over trade resumption, besides suffering losses on option contracts. Due to the gap in communication, intra-day trading positions were forcibly squared off on the BSE, resulting in losses for smaller traders.

The Securities and Exchange Board of India should expedite the investigation and take stern action if the exchange is found wanting in any aspect. The exchange also needs to be pulled up for not communicating clearly to investors about restarting trading. SEBI should soon frame rules for compensating investors in such events. Finally, another round of stress test is called for on all exchange platforms to see if they are equipped to handle the heavy load around the derivative expiry period.

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