Sebi steps in to prevent flash crashes at bourses


The regulator has introduced minimum pre-trade risk controls for all categories of orders placed on stocks, Exchange Traded Funds (ETFs), Index Futures and Stock futures. While the limit on value of an order has been fixed at Rs 10 crore, the stock exchange will be required to ensure that appropriate checks for value and quantity are implemented by the stock brokers with respect to the risk profile of their clients.

Sebi has also directed the stock exchanges to ensure that stock brokers put-in place a mechanism to limit the cumulative value of all unexecuted orders placed from their terminals to below a threshold limit set by the stock brokers.

Stock exchanges have also been directed to ensure that the stock brokers are mandatorily put in risk-reduction mode when 90 per cent of the his collateral available for adjustment against margins gets utilised on account of trades that fall under a margin system. Sebi's measures and directions are result of a flash crash at Nifty where it fell by 900 points to hit an intra-day low of 4,888 on October 5, 2012. Nifty hit the lower circuit and thereby closing the cash market automatically for almost 15 minutes. The crash was linked to erroneous trades worth $126 million, placed by Emkay Global Financial Services.

Risk checks

* Market regulator asks exchanges to put an upper limit on a single order at Rs 10 crore

* As a result it will be impossible to avoid the block deal window and route trades via normal window

* Decides to tighten the dynamic price band around a stock that will stretch only 10% either way

* Sebi has, however, said that in case of a trend in either direction, the dynamic price bands shall be relaxed in increments of 5%

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