Sebi mulls trading pause, order annulment in flash crash cases

Capital market regulator Sebi is looking at introducing a small-duration trading pause and annulment of orders to ring-fence equity investors in a 'flash crash' situation.

The proposed steps are aimed at containing the impact of any unusually large movements in share prices of big blue-chip stocks and benchmark indices, especially those triggered by the use of high-speed technology that allows execution of multiple trade orders within milli-seconds.

Sebi is of the view that immediate steps are necessary to tackle the challenges posed by possible mis-use of such a technology to manipulate the markets, a senior official said.

The steps being considered by the Securities and Exchange Board of India (Sebi) include allowing for a 'pause' or temporary halt in trading activities after any occurrence of flash crash-like situations, he added.

Besides, it is also being considered that the already executed buy or sell orders should be annulled if they are found, or even suspected, to have triggered flash crash cases.
A final decision on this matter would be arrived at after taking into account recommendations of Sebi's Technical Advisory Committe, whose members include outside experts. in this regard.

A 'flash crash' in the stock market refers to that situation when a major stock or a benchmark index suddenly falls by a wide margin. The Indian markets witnessed such a case last month when benchmark index Nifty fell by about 900 points within seconds due
to erroneous trade orders.

While a 'trading halt' system is already in place in Indian markets, which gets triggered once benchmark indices Sensex and Nifty move at least 10 per cent, there are no such mechanism to tackle any large-scale crash in other indices or individual stocks.

In the past, there have been cases of large-scale sudden plunge in individual share prices, mostly due to high-speed latest technology trading systems, without any similar movements in the two key indices, the official said.

Since the 900-point Nifty flash crash, these issues are being actively discussed within
Sebi and with the stock exchanges, among others. Sebi's International Advisory Board also discussed the matter at its meeting earlier this month.

It has been noted that market regulators across the world are currently facing technological challenges posed by High- Frequency Trades and Algo Trading, and a discussing ways in which regulatory authorities and stock exchanges can modify market structures to tackle these issues.

The regulator has also asked the exchange to ensure compliance by the brokers to fair trading regulations and to be extra careful in their trades to avoid erroneous orders that may cause unusual movements in share prices.

Both the leading exchanges, BSE and NSE, are consequently seeking stricter adherence by their member brokers to compliance with the due diligence norms to avoid repeat of a situation similar to Nifty flash crash in October.