PALAK SHAH | Mumbai, June 5 | Updated on: Jun 05, 2022

The payout of funds to the tune of ₹100-150 crore, in the matter involving a recent ‘fat finger’ trade in the derivatives segment of the National Stock Exchange (NSE), is likely to be delayed, sources told BusinessLine. The NSE is examining the matter after stock broker Vardhaman Global Sharecom wrote to market regulator SEBI and NSE saying that the shares were error trades. Just three brokers, who are proprietary traders from Kolkata and Delhi, are said to have made profits of nearly ₹105 crore out of the trade and the remaining ₹20-crore profits are widely distributed from other brokers who run automated trading, the sources said.

The NSE is treading a cautious path into the matter since an investigation by SEBI in 2013 had blamed the exchange’s risk management systems for failure to arrest a market fall triggered by a similar fat finger error by Mumbai based broker Emkay Global. In a notice issued by BJ Dilip, the then deputy general manager of SEBI, it was revealed that laxity of NSE’s trading systems could not avoid the error trades. SEBI was of the view that even if the brokers systems had failed, NSE’s risk management system should have been robust to check the huge error. A trader at Emkay Global had punched an order to sell 17 lakh baskets of Nifty amounting to around ₹974 crore instead of punching a plain sell order for ₹17 lakh worth Nifty. Emkay had suffered a loss of ₹51 crore on the trade. Later, when the matter reached the Securities and Appellate Tribunal, broker Emkay got 50 per cent of its money back.

In the recent incident too, it comes out that the NSE systems allowed the options trades to be placed at 99.99 percent discount to the prevailing market price, without there being any significant move in the price of the underlying index. Since there is no circuit filter in the options segment or even a broad price band, the entire order coming from Vardhaman Global worth between Rs 100 to ₹150 crore got executed. Also, it needs to be checked if these were automated trades or manually punched since most large options traders are now using automated trade softwares for order execution. Exchanges the world over have experienced similar problems—for different reasons such as some algos going berserk, sometimes due to market manipulation of algos or just a fat finger trade. Like the case of Emkay, if this time too it was the failure of exchange’s risk management, which also needs to be investigated and hence payouts could get delayed, a regulatory official told BusinessLine. SEBI has prescribed that a trading member’s position limit should not exceed the higher of ₹500 crore or 15 percent of the total market’s open interest in an index futures contract. But it is not clear if there are clear guidelines for options too. Broker Vardhaman Global has said in its letter that its client Kuber India Fund, registered as a foreign portfolio investor (FPI), erroneously sold a million call options of Nifty index at an average price of ₹399 against the prevailing price of ₹2,130. Market sources say several thousands of these options contracts were sold at just ₹0.15 paise and there was no mechanism either with the exchange or clearing corporations to check this. The NSE had not cancelled the trades in the matter involving Emkay Global but market regulator SEBI has a policy where trades can be cancelled once it is established beyond doubt that they may have emanated from Fat Finger error. In 2011, the BSE had cancelled all the trades of a Delhi based broker after it had come to light that error trades were a result of algo software gone wrong. NSE did not comment on an email query.

Published on June 05, 2022