The Securities and Exchange Board of India (Sebi) has decided to tighten the dynamic price bands — popularly known as dummy filters — on stocks that are part of the benchmark indices. The regulator has also put additional controls on each order quantity to minimise the probability of a flash crash.
“It has been decided to tighten the initial price threshold of the dynamic price bands. Stock exchange shall set the dynamic price bands at 10% of the previous closing price...” stated a circular issued late on Thursday.
Further, the dynamic price bands can be relaxed by the stock exchanges in increments of 5% based on the market movement.
Such price bands would be applicable on stocks on which derivatives products are available and also on stocks included in indices on which derivatives contracts are traded. Further, this will also be applicable on index futures and stock futures.
The capital market watchdog has also introduced order-level checks, including minimum pre-trade risk controls for all categories of orders. Exchanges will also have 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.
Any order with value exceeding R10 crore will now not be accepted by the stock exchange for execution in the normal market. Further, the exchange will have to ensure that appropriate checks for value and/or quantity are implemented by stock brokers based on the respective risk profile of their clients.
Stock exchanges have also been directed to ensure that the stock brokers are mandatorily put in risk-reduction mode when 90% of their collateral available for adjustment against margins gets utilised on account of trades that fall under a margin system. Stock exchanges may prescribe more stringent norms based on their assessment, if desired, added the circular.
The review of the checks and balances has been necessitated due to a flash crash 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.