The Securities and Exchange Board of India (Sebi) is expected to introduce checks on individual order quantities that dealers can key in, so that the probability of a flash crash could be minimised. This would be the first time that the regulator would impose checks on the order quantity as all current restrictions are related to the price of the shares.
According to two persons familiar with the development, the regulator is of the view that checks related to the price movement of shares are not sufficient to avoid a sudden crash in the indices and, so, there a need to have a cap on the order quantity as well. Bulk and block deals, however, would be exempted from such checks.
It is also believed that Sebi is not keen on disturbing the current system of dynamic filters in the index stocks as it could have an impact on the derivative segment. Stocks that are not part of the derivative segment have fixed circuit limit ranging from 5% to 20%.
Order quantity checks seem to be the only logical solution as any more restrictions related to price would disturb the market equilibrium, said a person familiar with the development.
While the price restrictions are dynamic in nature, the order check would most likely be static, he said, on conditions of anonymity.
According to another person privy to the development, the regulator has arrived at this solution after analysing various global practices. There is a common view that too much restrictions on the price movement impacts the market functioning and, so, quantity level checks need to be introduced, he said.
Sebi chairman U K Sinha had recently said that the risk management review committee has submitted its suggestions and a decision would be taken soon. The committee has submitted its report (and) we are likely to announce our measures very shortly, Sinha said last month at an investor conference.
The review of the checks and balances has been necessitated due to a flash crash incident in October that saw the benchmark Nifty of the National Stock Exchange (NSE) shedding more than 15% in just a few seconds. The crash was the result of erroneous trades worth $126 million, placed by Mumbai-based brokerage Emkay Global Financial Services.