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Emkay freak trade: SAT order may force margin rules review

Emkay freak trade: SAT order may force margin rules review

Santosh Nair

Stock exchanges may have to review their rules on the collection of margins from trading members, as the probe into the freak trade by brokerage house Emkay Global in October 2012 has shown that some brokers had put in huge buy orders without depositing adequate margin money with the NSE.

Under the current system, brokers can execute trades even after 100 percent of their margin utilized, to ensure that large orders under execution are not stopped midway due to margin shortfall. After the trade is executed, the broker can deposit additional margin with the stock exchange, with a penalty. But the penalty amounts—Rs 5000 for the first violation and Rs 10,000 for the second—are a pittance compared to risks that the system can be subject to if the trades go awry.

On October 5, 2012, a dealer at Emkay Global erroneously punched in a sell order for 17 lakh Nifty units, instead of Rs 17 lakh worth of a Nifty basket of stocks. The order sent the Nifty crashing by 15 percent and trading was suspended for 15 minutes. Emkay Global tried to reverse the faulty trade by buying an equivalent number of Nifty units, but incurred a loss of Rs 51 crore as prices moved up sharply.

During the probe into the trade, it surfaced that two counterparties to the Emkay trade—Prakash K Shah and Inventure Growth—who gained the most from the freak trade, had put in buy orders way below the prevailing market rates an without margins to back the trade.

This aggravated the problem, because the Nifty index went into a free fall of 15 percent, instead of halting at 10 percent when the first index circuit breaker is triggered.

When the index hits the 10 percent limit on either sides, the circuit breaker is triggered, but trading does not immediately come to a halt. The system stops accepting fresh orders, but ones that have already been entered before the activation of the circuit breaker, gets activated. In this case, since counterparties, which included Prakash Shah and Inventure, had placed buy orders up to 18 percent below the previous day’s closing prices, the orders got executed and pulled down the Nifty by 15 percent.

Excerpts from the SAT order:

“From a practical view point, members put in margin, which is based on
their daily average trading in a day i.e. expected gross open positions and put up that much of margin upfront. However, there are problems when members do trade in excess of margin and to take care of such possibilities, system generate alerts when margin upto 70%, 80%, 90% and 95% is traded and trading system is expected to stop taking up further orders from member when margin utilization is 100%.

To stop trading on exhausting 100% margin, SEBI had instructed NSE
to have such a system in place, which will disable a member’s terminal on
reaching this limit. However, NSE has interpreted this in a different way – that members have been instructed to stop trading on reaching 100% utilization of margin.

NSE is definitely not justified in passing the responsibility of stopping trading on exceeded available margin to members and should have tried to implement this in their trading systems and if it was not possible, due to some reasons, should have brought this to notice of SEBI. This was not done and to resolve this SEBI and stock exchanges should
consider what has to be done to address this problem”


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