An Overview of Monday’s Fake Surge
On Monday, derivative traders on the National Stock Exchange (NSE) were sent into a frenzy when Nifty index futures soared 805 points, or more than 5%, within seconds of the opening bell, despite no equivalent move in the underlying cash market.
The Nifty futures (current month expiry) achieved a fresh all-time high of 16,546 after closing at 15,741 the previous day. The underlying Nifty index was also trading below the 15,800 mark.
Stop-Loss Orders Triggered
Stop-loss orders were triggered as a result of the enormous surge in Nifty futures, which is one of the world’s most traded derivative contracts, brokers from Mumbai, Delhi, and Bengaluru stated. A stop-loss order is used to restrict a trader’s loss in the event of a market movement that isn’t favourable. These directives were triggered for no apparent cause on Monday.
There appeared to be some pause for approximately 27 seconds after the NSE began trading at 9.15 a.m., as several trade orders could not go through. After that, Nifty futures hit a high of 16,546 in a ‘flash.’ According to a regulatory official, this is what caught most brokers and their clients off guard.
Since stock trading, particularly derivatives, is now a game of machines, a market delay of 27 seconds can have a significant impact on earnings and losses. Microseconds are used to complete trades. Many estimate that on a typical day, 2-5 crore trading orders, worth several hundred crores, may be handled in 27 seconds. Most crucially, during the early hours of the trading day, the trade heat or intensity is at its peak.
Nifty futures (current month) were last traded at 15,868 at Monday’s market close. This was in accordance with the closing price of the underlying Nifty, which was 15,834. This isn’t the first time that a sharp increase in index prices has caught traders off guard, but the NSE has a track record of doing so. It’s crucial to understand who benefits from flash spikes and how they happen in the first place. Traders are losing faith in the market.
“A broker placed a manual purchase order for Nifty near month futures in the first few seconds after the market opened,” the NSE said in response. The order matched with existing sell orders in the book because it was within the operational range. Two deals were completed at a price that was within the trading range.
Following the above execution, the aforementioned order was entered into the order book at the limit price and awaiting quantity. The order was later cancelled by the dealer. Other orders from a few members were entered at a price that was outside the trade execution range but within the operational range, but they were not completed because they were outside the trade execution range. Following that, these orders were cancelled.
The NSE stated that it has asked members for explanations. “We would like to emphasise that NSE systems were operational as usual, and all orders were executed within the prescribed operating and trade execution ranges,” the statement added.
What Role Does Interoperability Play in the Event of a Trading Halt?
If a stock exchange or clearing firm has a hitch or outage, interoperability becomes critical. Because the clearing corporations are linked, deals can be resolved through a different clearing body if one of them is down.
Consider the trading halt on the NSE in February. While trading on the NSE came to a complete halt, normal trading continued on the BSE, with trades being cleared through the clearing corporation of the BSE.
The technological glitch had also disrupted the “online risk management system of NSE Clearing,” according to NSE in February. To put it another way, both the NSE and its clearing corporation were affected.
Even if the exchange was operational and just its clearing house was impaired, settlement of trades on the NSE would not have been impacted because the clearing house of the BSE was fully operational.
If interoperability is completely functional, all settlement activities can be easily shifted to the other clearing company if one of the clearing entities experiences any form of disturbance.