Indian Stock Market Casino on Steroids

The Indian Stock Market saw a Fat Finger trade which caused a massive 15% flash crash in India’s bench market stock index Nifty for a few minutes before the markets recovered. In an incident very similar to that caused by Knight Capital, a trader at Indian broker Emkay Global endangered the very existence of his company by pressing a single button. The massive sell order led to a huge fall in major blue chip stocks leading to a temporary freeze of the stock market. The brokerage Emkay was frozen from trading in the Indian stock markets and now it is trying to stave off bankruptcy as the loss of Rs 51 crores is almost half of its stated net worth. The exchange is trying to retrieve the situation for Emkay by asking fellow brokers to return the money they made by the error. Note the profits were made after Emkay was forced to buy back the positions at much higher prices while the other brokers benefited by buying the shares at much lower prices (they had bids at very low prices which allowed them to make windfall gains).

Note Flash Crashes are not new to the Indian market as recently India’s biggest company by market value, Reliance saw its stock crash due to a wrong sell order. Like other stock exchanges, HFT and Algo Trading have increased volatility dramatically. While Emkay may or may not survive, the outcome is that more and more investors are losing confidence in the integrity of the markets as it looks increasingly like a casino on steroids.

India’s Biggest Stock Reliance Flash Crash

After the Dow and the other US indices crashed by almost 8% in the infamous “Flash Crash” during the Greek contagion, India got its own smaller version of the “Flash Crash” with Reliance shares falling by almost 20% in less than a minute due to a trader error. Note Reliance is the largest constituent of India’s Nifty and BSE indices and a 20% fall could have cascaded into a major market panic if this had happened 2 weeks ago. The problem occurred only in the Bombay Stock Exchange (BSE) and did not affect the National Stock Exchange (NSE).

Nifty’s earlier Mini Flash Crash

The Indian Stock Market saw a flash crash on the morning of 20th June at 10 am. The market which started weak at 9 am fell by almost 3% in 10 minutes. The main index Nifty which was trading at around 5350 crashed to around 5200 in around 10 minutes. The market recovery by 1% but is again starting to go down to the low levels for  5200. Note the Indian stock market has been hammered due to worries on inflation, massive endemic corruption which is facing protests from the civil society. The FIIs which are the main buyers of Indian equities in the last year or so seem to have abandoned the Indian stocks as QE2 starts ending and global risks like Greece, US slowdown, inflation and interest rates worries in emerging markets  come to the fore. Note Indian stock markets are not the easiest to invest in with scams and scandals happening regularly and it at best remains a market in which you have to choose between the bad and the ugly.

Hindu

The stock of Emkay Global will be at the receiving end this week following last week “erroneous trades.” While the company did not disclose the losses, the media estimates it as “Rs 51 crore.” Soon after the incidence, the NSE disabled Emkay Global trading activity to facilitate investigations and primarily to prevent any further exposure until this settlement is over. Emkay Global clarified that “all our remaining clients’ outstanding positions are intact.” It also sought annulment of the trades. “We are hopeful that this obvious and apparent error would justify the annulment of these trades, and believe in the NSE’s professional management to see the merits for annulment, which is the practice worldwide.”