FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES FREAK TREADING: CHALLENGES   AND PREVENTIVE MEASURESDr Kunal Pandya    ...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES                                        ABSTRACT:       The Capital Mark...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESContentsABSTRACT:..........................................................
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES                                    INTRODUCTION:       Indian stock mar...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES        Though freak trading is a minor issue in capital market, and tha...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES3. Reuters: Freak Trade again? NSE probes decline in Tata Motors,Ultrate...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES                INTRODUCTION OF THE FREAK TRADE:       Since inception, ...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES       The hype of freak trade came in to existence on 5 th October 2012...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES  BACK GROUND INFORMATION OF FREAK TRADING IN                           ...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASUREScreated a freak in the market and thus this kind of treading got name of...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES       The reported incidence had seen certain policy formation and cert...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASUREScase there is a fall below a particular price level, the algo will initi...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES   • 5th October 2012:       5th October is the worst day in the history...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES       The same day Emkay Global has issued order in various blue chip c...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESII.   Bharati Airtel: Bharati Airtel is the giant company in Indian mark...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESIII.   Hindustan Unilever Limited: The HUL is the most prominent company...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESIV.   ICICI BANK: just like other companies in the market, ICICI bank ha...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES       Emkay Global has realized this manmade mistake so early in the du...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESgenerated by SEBI to analyses the situation and to recover the data of t...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESjust halt for less than 15 minute period only. He quoted that: “There wa...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESultimately been rectified by the cancelation of the same order with in f...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASUREScrore and net worth around 140 crore rupees. The company was having high...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES       In recent situations, where we are transferring to T+2 trading cy...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES       In the transformation of infrastructure, SEBI is trying to improv...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES       SEBI is under the surveillance of this preventive measure and hop...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES http://www.business-standard.com/article/markets/nifty-dips-15-in-frea...
FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES http://www.business-standard.com/article/markets/nifty-dips-15-in-frea...
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Freak trading Research Paper

  1. 1. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESDr Kunal Pandya Dr Snehal Mistry 1
  2. 2. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES ABSTRACT: The Capital Market segment, National stock exchange and Bombay stock exchange aretwo of the world’s biggest exchanges which are controlled and restricted by “Securities andExchange Board of India.” Even though having various rules, regulations & controllingmeasures, Cash segment of the national stock exchange has shown sudden spike in prices-Freak Trading, have wiped off 16% of nifty in two minutes with the reduction of 10 lakh crorerupees of market capitalization of investors, reducing the confidence of investors and agents inthe market and making many investors exit from the investment market. By the words of RichardBentley, vice president of Progress Software: “Lack of test undoubtedly was the root cause ofmany recent mishaps.” Market has shown 900 points drop which failed to forcing the exchangeto temporarily shut down operations. To prevent future mishap’s SEBI is undertaking variouspreventive measures where they are paying more attention to “What if” situations rather thantaking system as granted. “Abnormal orders resulting in multiple trade of low prices arerestricted through equal importance to institutional investor with certain daily limit of theexecution of the order and gathering quarterly compliance reports by which SEBI is hoping torestrict the malpractices of the exchanges and regaining the investors’ confidence to boost thecurrent capital market scenario and to generate vibrant practices of the current capital market. 2
  3. 3. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESContentsABSTRACT:..............................................................................................................................2Contents..................................................................................................................................3INTRODUCTION:......................................................................................................................4LITRATURE REVIEW:................................................................................................................5INTRODUCTION OF THE FREAK TRADE:....................................................................................7BACK GROUND INFORMATION OF FREAK TRADING IN INDIA:.................................................9CONCERN OF SECURITY AND EXCHANGE BOARD FOR FREAK TRADE:.....................................19PREVENTIVE MEASURES BY SEBI:...........................................................................................21BIBLIOGRAPHY:.....................................................................................................................25 3
  4. 4. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES INTRODUCTION: Indian stock market got converted into computerized system since 1991 to prevent thevarious scams like Harshad Mehta scam & Ketan Parekh scam. Even though the computerizedsystem of trading and transaction was innovated with the motive to smoothen the transactionsand restrict the malpractices of the share markets, the system which was created to restrict itselfbecomes the system of malpractices. After the introduction of new system, the system came withsuch loopholes which created disaster to the market of India. Among those disastrous practises,one is known as freak trading. Since 1991, freak trading was a common issue prevailing into current market but year2010 was the year where for first time freak trading came out in picture. Rounds of tradingturned out to be freak trading, which never attracted attention of SEBI, brokers, investors andnormal people. But the freak trade by Emkay Global Securities Limited gathered the eyes ofeveryone on the same issue keenly. Emkay Global has created the disaster in market where justby one company and in 2 minute, market capital was reduced by 3 lakh crore rupees. On 5 th ofOctober 2012 the market has shown reduction of around 900 points in cash segment of S & PNIFTY which is the benchmark of National Stock Exchange of India. Emkay Global issue was a precautionary signal for the market, SEBI and brokers ofvarious cities of the country. Trading which can reduce various people’s market capitalizationjust because of the mistake by one simple trader of trade union had forced SEBI to measure therestrictive policies to prevent this kind of mishaps. SEBI (Security & Exchange Board of India)came out with various steps which includes restriction of trade has undergone with variouschanges to make market trade movements very smooth. Though, SEBI has undertaken various preventive measures to restrict various scams andfreak trading malpractices of the security market and capital market, the measures and systemitself failed very bad that the system needed reconsideration and alteration to restrict this kind ofmalpractices. 4
  5. 5. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES Though freak trading is a minor issue in capital market, and that too with the preventivemeasures been undertaken, the major concern for SEBI become to rectify the system itself torestrict further issues like freak trading. LITRATURE REVIEW:1. According to “Palak Shah” titled: Freak trade at NSE: Rs 3 lakh cr erasedin 2 minutes:- On 5th October 2012 at 9:49am, in the NSE there was a decline at 900 point withreduction of around 3 Lakh crore rupees of market capitalization. Emkay Global FinancialServices issued trade of 59 stocks in shares like State Bank of India, ITC where mistakenly 65crore cash sell was issued at 650 cr which ultimately reduces NIFTY by 16% requiring to halt &trigger trade to halt by 1 hour as per rule instead, the trigger was for 15 minute only. Accordingto SEBI, the mistake was made by Emkay Global which traded in cash market and part paymenthas been paid. But due to this mistake, market capitalization of Emkay Global reduces from 70crore to almost loss of 50%.2. Santosh Nair: Freak trade to cost Emkay Rs 51 crore; in talks withbrokers:- According to Santosh Nair on 5th October, one of the broker has mistakenly sold 65 croreRs shares value of 650 cr rupees where they come to oversold position triggering price to go waybelow (almost 15 to 20%) in some selective shares which ultimately had given opportunity forbuyers to buy shares at very low price. To rectify these mistakes, Emkay also needed to buy 650crore rupees of shares from market. It has suffered loss of around 51 cr rupees which has passedto many small brokers of the country. The ANMI (Association of National Exchange of India)and BSE brokers forum is requesting to brokers to participate in reducing loss of Emkay Global.SEBI has taken this manipulation seriously and started making various regulations against thestock brokers. 5
  6. 6. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES3. Reuters: Freak Trade again? NSE probes decline in Tata Motors,Ultratech:- On 2nd Feb 2013, NSE has seen freak trade again on Tata Motors and Ultratech cementwhere one broker company has placed sell order way below than the trading price prevailing inthe current market situation which has shown almost 10% decline in shares prices. According toSEBI, although the trading was within the limit of stock exchange & SEBI rules. Although SEBIconfirms it is a freak trade where one broker has misplaced the order with lower price. It alsoseems that in large cap market bid - ask spread was abandoned, though this kind of malpracticesare performing in the market.4. Reuters Market Eye – Shares in Bank of India make a sharp fall beforequickly recovering in what some traders describe as a “freak trade”:- On 5TH Feb 2013, the Bank of India shares shown a reduction of rupees 22.65 with thedenomination of 336.65 rupees which is a down of 7.8%. Around at 12:20pm IST, this kind ofreduction happened at the National Stock Exchange which ultimately described as a freak tradingwhere most of major blue chip shares like Tata Motors, Ultratech cement have also shown asmuch as 10% reduction, which was actually the cause of technology glitch at Religare Capitals. 6
  7. 7. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES INTRODUCTION OF THE FREAK TRADE: Since inception, national stock exchange and Bombay stock exchange has seen immunegrowth with the number of companies and market share also. Most people and traders areentering in the NSE and BSE which consist of around 99% of the total investment and activitiesin countries stock exchanges. Among all NSE and BSE are known as most sophisticated andmost structured stock markets in world. In the year 1992 when government of India amended theAct known as Security and Exchange act, 1992 that moment the stock market converted itsphysical based trading to Screen based treading and this immense change increased theinvestment base in the market only. Even though SEBI act 1992 was introduced to smoothen the process of the marketmovement with the security and safety of the investor, still in certain ways there become variousissues and scams in the capital market in larger cases. Whether we takes example of HarshadMehta or Ketan Parekh, in all cases man made mistakes or manmade blunders created scams andcreated reduction of investors capital and investors trust in to capital market. Among all of thisvarious scams happened in the various stock markets, the most recent scams which have createdmajor issue for the stock market and Security and Exchange Board of India is the Freak Trading. Freak Treading by its name shows that this is the treading which creates a freak in themarket. By large the definition of freak trade is: “freak treading is a treading in either Buy or sellin the cash market segment of the stocks where the price or the quantity of the stock was quotedwrongly by manmade mistake which creates huge reductions in the prices of the that particularshare or the market benchmark.” Trading which includes the wrong price of at the time ofpurchase or sell in particular intraday transection or the treading in which either buy or sellquantity were of so large amount which ultimate increases or decreases the price of the productso large creating the Freak in the market for the upward or downward movement of the price andthis is why this treading is known as the freak treading. 7
  8. 8. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES The hype of freak trade came in to existence on 5 th October 2012 where just because ofthe manmade mistake of one broker market has shown 16% reduction in the market. Thebenchmark share NIFTY has shown tremendous reduction of 3 lakh crore of rupees in the marketcapitalization of the share. The market was halted for 15 minute for trading purpose. One brokerhas mistakenly orders of 650 cr rupees instead of 65 cr rupees which have created an impact ofdecline in major blue-chip stocks of Indian market. It becomes necessary for us to understand theHistory and issues related to impacts of freak trade. 8
  9. 9. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES BACK GROUND INFORMATION OF FREAK TRADING IN INDIA:  June 1 2010: June was the date where for the first time Indian market seen the freak treading. Duringthe trading session of the 1st June, shares of reliance falls almost 20% from the previous day’sclosing of the Sensex. Previous day closing for the stock reliance industries was 1045 and as perthe below data the we can see that the day closing of the stock shows about 840.55 which isalmost about 204.45 point of reduction which is almost 20% of the market. Even in the below picture of the Sensex we can see that the Sensex for the first Junestarted with 16943 and the day low was 16318 which had shown the reduction of around 630points. The most surprising thing was that even though the market was running smoothly on 1 stJune 2010 through just a manmade mistake by some of the broking company in the blue chipcompany reliance industry had shown the reduction of the shares price of 20% while it reducesthe Sensex by almost 5% and reduced the market at very large position with reduction of marketcapitalization of various investors. This incidence kept the attention of SEBI at large as it has 9
  10. 10. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASUREScreated a freak in the market and thus this kind of treading got name of Freak Treading. 10
  11. 11. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES The reported incidence had seen certain policy formation and certain preventive measuresby the SEBI at large and had made foundation methods to track down the freak trading in thestock markets of the India. By large these preventive measures were the transformation ofInfrastructure only which at large created some room for the development of the manmadeblunders which can create huge problems for the investors of the Market. • 20 April 2012: There were huge and abnormal activities been performed on 20 th April 2012, Where thenifty future fall sharply from 5338 to 5000 which was a drop of around 7% with in very fewseconds but later on it recovered and settled to around 5300. Surprising things were that till thisduration around 35000 lots worth of 17.5 lakh shares were been traded in the future market. The situation in nifty future occurs just because of the manmade mistake where theperson can mistakenly punched or enter a sell order with a wrong quantity price or it is alsopossible that it may be due to the algorithmic treading where it is a program treading which in 11
  12. 12. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASUREScase there is a fall below a particular price level, the algo will initiate the sales no matter of whatthe price is. The basic idea of the situation can be stimulated that on the same day there was a deepprice movement of Infosys shares which has shown the reduction of around 20%. By theinvestigation of the SEBI it came out with the theory that any manmade mistake to the Infosysshare could have plugged either lower prices or more quantities. This would have reduced themarket price of the INFY future which might have reduced the Nifty future by this large amountalso. This kind of treading was known as Flash Crash in the future market. 12
  13. 13. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES • 5th October 2012: 5th October is the worst day in the history of the National stock exchange and also in thehistory of the freak treading where the marker totally lost 3 lakh crore rupees of marketcapitalization and that also to the reason of one freak trade. On the same day, one broker named Emkay Global financial services, trading for a sellorder on an institutional investor for Rs. 65 crore of rupees mistakenly quoted the order of 650 crrupees creating a hype of the down ward trend of the prices in various blue chip companies of theNational Stock Exchange. Emkay global has mistakenly traded in 59 trades at same time forplacing 650 cr rupees of shares sold at very nominal price in the market. The only issue whicharises in the market was the supply of the shares becomes so much than the demand of the shareswhich ultimately forced the prices to go much below than the last traded prices in the market. The same day of this freak trade the national stock exchange benchmark “ S&P NIFTY”had started its treading with the open price of 5815 which just because of the mistaken trade ofEmkay Global reduced to 4888 point which was the reduction of around 16% than the previoustrade. This reduction of around 16% in the market has washed away the market capitalization by300000 cr of rupees. Which is almost a huge amount for any of the markets? 13
  14. 14. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES The same day Emkay Global has issued order in various blue chip companies of Indiawho all are having good presence in the stock markets of India and which actually covers the20% portion of the overall trade and market capitalization of the Indian capital market. Let uslook at the Impact of this freak trade on these shares. I. Reliance Industries: reliance industries are the most traded security in the marker with the majority of market capitalization in National Stock Exchange of India. Due to the Freak trade by Emkay Global on 5 th October, the prices of the reliance industries which were around 860 rupees reduced to around 683 rupees which is almost the drop of 180 point representing the drop of almost 20% just because of the freak treading leaving investors to lose millions of rupees. 14
  15. 15. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESII. Bharati Airtel: Bharati Airtel is the giant company in Indian market who is having its presence with the telecom and mobile communication system. Bharati Airtel is one of the leading companies in India who always have shown stable and sustainable growth in terms of security market. But on the freak treading day, bharati Airtel which was started its trade from 271 rupees reduced to 215 rupees showing the difference of around 20% in the share prices of the company. 15
  16. 16. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESIII. Hindustan Unilever Limited: The HUL is the most prominent company in the National stock exchange of India. HUL is a subsidiary company of Unilever limited which is a multinational company. HUL itself is the preference for majority of the stock brokers for the speculative and earning prospective. The same situation has seen in the freak trade of the Nifty where mistakenly the market price of the HUL which was 559 reduced to 444 showing almost 110 point difference and 20% reduction in the prices of the shares. 16
  17. 17. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESIV. ICICI BANK: just like other companies in the market, ICICI bank has shown the crash in the prices two which is as below. 17
  18. 18. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES Emkay Global has realized this manmade mistake so early in the duration of few minutesonly but still the market has reacted so suddenly that majority of the trades gets executed andconverted to sold shares. The outcome of the freak trade was many of the dealers who havequoted very low price for the particular shares got the order executed and the amount paid forthese shares were so low that these investors have made around 20% of the profits just by themistakes of some other Broking House. Emkay global itself is a registered company in the stock market which does have a networth of around 148 cr rupees and a market price at that moment was around 32 rupees of ashare. Just because of this freak trading in the market Emkay Global needed to pay the cashreserves of the particular Trades which were already converted in the small duration of thissystem. Apart from that the Emkay global also needed to pay penalty to the Security andExchange board of India for this mishap. The total loss to this company for this manmademistake was around 60 cr rupees which is almost 50% of its net worth. The impact of this issue was so huge that the benchmark share of National stockExchange of India S&P NIFTY was been halt for treading for 15 minutes. This trigger was 18
  19. 19. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESgenerated by SEBI to analyses the situation and to recover the data of the shares. Just 2 minutesof manmade mistake has washed lacks of crore rupees from the market which ultimately showsthe failure of the market.  5Th February 2013: On 5th February 2013, nifty has shown the sudden drop of around 10% prices in theshares of Bank of India, Tata Motors and Ultratech Cement. The Security and Exchange board ofIndia has started the investigation and came out with the solution that the broking firm Religarehas mistakenly issued the order of shares which has lowered the prices of the shares. Theofficials of the religare have issued a press note stating that the company is utilizing the thirdparty software to trade in the stock markets. The system has shown some errors which havecreated false orders. The fault was the only system where the system has mistakenly placed thefreak order which has rectified so soon. The reduction in the price was within the limits of theNifty. CONCERN OF SECURITY AND EXCHANGE BOARD FOR FREAK TRADE: Majority of the trades in the stock exchanges are within the regulatory frameworks ofSecurity and Exchange board of India’s rules and regulation. In the cases of scams and Freaktrades, SEBI plays role of investigator and restrictor for further issues in the market. In the caseof Freak treading in India, SEBI has started the investigation in the market system, where theycame out with the investigation that the problem of the freak trading was just a manmade mistakenothing else. The issue was conversion of the manmade mistake in providing the market orderswhich ultimately created the issues of Freak Trading. Regulatory frame work stated by NSE senior VP Ravi Varanasi quoted that the markethas seen the freak trading but the system was not the issue for freak trade and that’s why themarket has not halted its transection for more time. The markets at the times of Freak trades were 19
  20. 20. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESjust halt for less than 15 minute period only. He quoted that: “There was no technical glitch. Itwas a normal market order.” He clarified a large order was placed erroneously and trading wasnot halted for a longer duration, as required under the norms, because the entire market could notbe made to suffer”. The VP of NSE stated in his quote about the technical glitch in which he hasculprit the company for the fault and just because of a manmade mistake the market does not gettriggered and cultivated its regular transections in the remaining duration of the functions. All the senior officers of SEBI are just targeting the company for all the faults happenedfor the Freak trade but none of the officials have ever put their attention on the overallfunctionality of the market infrastructure which is at ease a lot. The major concern for any of thestock exchange is the possible infrastructure failure which can create a huge danger for any ofthe investor in the market. Thus any of the regulatory body never conveys the mistakes of theInfrastructure of the stock market and regulatory functions of the particular body. In the freak trade case in NIFTY, the major concern which arises is the failure of themechanism of the stock exchange regulatory system. In Indian stock exchange the stock marketsfallows the trigger mechanism where if the share or benchmark share prices increases ordecreases to certain amount in terms of percentage than the market triggers and stops thetreading section for certain period of time. Rules say trading should be halted for an hour if there is a fall of 10 per cent in the Niftyor Sensex before 1.00 pm and for 30 minutes if the limit is breached between 1 pm and 2:30 pm.These norms are similar if indices rise/fall by 15 per cent and 20 per cent. These rules arepreventive measures for any freak in the markets for the investors. If market moves above 10%trigger than the market steps its movement for one hour which has to be happened at the times offreak trade where the prices of the particular share as well as benchmark share has reduced by16% to 20%. The mechanism should have stopped the treading in the market for any furtherreduction in the market prices but in none of the cases of freak trading this kind of triggermechanism worked. The only reason to this system mistake can be justified that whenever the freak tradinghappen in the market, all the trades were manmade mistakes which have been rectified with inthe few minutes of the transaction. It means that even I the mistakes are happening which 20
  21. 21. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURESultimately been rectified by the cancelation of the same order with in few minutes whichultimately bring the market prices back to the same movement. The market security forces statesany changes in the market price above trigger prices only if the trade was stated for few minutes,but in this cases the movement was stopped and canceled which makes the market mechanismfaulty for the systems of freak trading. Looking at the mistakes of man and a system, showing the consequences of SEBI forpreventive measure, it becomes necessary for us to look at the various preventive measuresundertaken by SEBI for the prevention of Freak Trade. PREVENTIVE MEASURES BY SEBI: Security and Exchange Board of India, who has introduced mechanism in the year 2000,has not changed single methodology since it. The system setup in 2000 was so rigid andunstructured which has cultivated various ways of scams and scandals. SEBI chairman, after thefreak trade on October 2012, stated in one report that they are not at all in hurry to investigateabout the case because they want to be very cautious in whatever new structure they have placed.SEBI wanted to do wide range of consultations and stress testing of various systems. By large, SEBI has taken the issue very seriously and is doing various measures toprevent freak trading, some of them are as below:-  Suspension of Emkay Global’s trading license: - On 5th October 2012 one of the broker has mistakenly traded a block deal of 59 tradescosting 65 crore of sale. The trade was mistakenly placed to 650 crore rupees which ultimatelywas rectified by the brokerage firm, still it created freak in the National Stock Exchange for 2minutes which ultimately suspended the trade for 15 minutes. SEBI has undertaken this mistake of Emkay Global very seriously. The company wasstarted by too chartered accountants with the view of trading and brokerage of stock exchanges.This company is a listed company in the stock exchange with a market capitalization of Rs 75 21
  22. 22. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASUREScrore and net worth around 140 crore rupees. The company was having high liquidity in terms ofcash to trade in the market aspect. Even though the company was having enough liquidity position, SEBI has suspended thetrading license of Emkay Global. The company had paid all the penalties to the SEBI, still thelicense was suspended. SEBI chairman Upendra Kumar Sinha stated that, cancelling the license of Emkay Globalis a decision of SEBI to provide strict impression in the market for the companies who arecreating hype and freak in the market. Suspension of the trading was a historical example by theSEBI to all the broking companies for a preventive measure. Emkay Global was a huge company who participated for major terms of trading in NSEcash segment. Even though after paying penalties, the company’s license of trading wassuspended. It really shows that how serious SEBI is to prevent this kind of freak trades in thecountry. The broad steps taken by SEBI provided red signal for all the broking companies statingto comply with rules and regulations of SEBI for smooth trading of the markets.  Imposing cash margins on institutional trades: - Stock market transaction does convey two methods. One method is cash method andsecond method is margin method. In terms of cash method, generally the buyer needs to pay thefull amount. In margin method buyers put margin only and rest of the amount is paid in laterstages. The basic preventive step SEBI took is impose of the cash margins on the institutionaltrades. Generally whenever the institutions are participating in cash segment market of thevarious stock exchanges, that time they make either short buy or short sell, where they just needto pay small portion of the amount and rest amount will be paid at later time. When institutional trades are doing trade, if that moment they need to create some marginpayment by cash, that moment will restrict them to convert major trades because of cashrestriction or liquidity restrictions. Major of the trader’s trade for clients where client insist tomake margin calls. Whenever this kind of margin calls occurs in market, each and every tradershould deposit some cash margins for the trade. 22
  23. 23. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES In recent situations, where we are transferring to T+2 trading cycle, imposing cashmargins for institutional investors will help the SEBI and market to work safely without anyscams. The cash margin imposed to the institutional investors will restrict the freak trade bylarge. After imposing these cash margins, all the institutional traders need to deposit certainamount of trade in terms of cash when they are doing any trade transaction in market. Wheneverthe trade is within the cash margin limit, it will ultimately been executed but if the cash margin isbelow the required margin that moment the transaction will not be executed which will restrictthe order. The preventive measure will help in large to restrict the freak trades in NSE & BSE.Whenever any transaction occurs in market which we called freak trade will first need cashmargins to execute the order. Once the company doesn’t provide cash margin, ultimately thetrade gets suspended and the market panic will not occur just by any manmade mistakes. Thus itprovides very feasible solutions for the freak trade, which SEBI has planned to perform.  Setting up risk and surveillance infrastructure: - Security and exchange board of India is always looking to simplify and clarify the tradingmechanism of the markets. In the process of simplification of the trading terminals and traders,SEBI introduced various infrastructures to traders. One of the major transformations is theintroduction of computerized trading system in Indian markets. Apart from that, Security and Exchange Board of India has started various yearlycompliance report submitted by the brokers and traders of the NSE & BSE. These compliancereports must need to provide the liquidity positions, trader situations and compliance with thecustomers are necessary. Apart from that traders also need to provide various basic informationabout trading which occurred and conducted by traders during the specific period of time. Initially, the SEBI wanted to conduct this risk surveillance every year but later on due tomisconception scams and manmade blunders, SEBI started conducting these reports quarterlywhere each trader are in the need to provide risk report every quarter and depending on that basistheir trading license will be renewed. 23
  24. 24. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES In the transformation of infrastructure, SEBI is trying to improve the trading cycles wherethey want to convert the cycle from T+2 T days. They are also planning to reduce the 15 seconddelay which actually prevails in the current security market which shows the changes of price.These changes are causing many orders to over value and under value then the actual order.Thus, a step of SEBI for the surveillance of risk and infrastructure is a very broad step.  Imposing small momentum circuit for small duration: - Since the computerization of the securities exchanges of our country, SEBI has imposedcertain limitations and restrictions to prevent massive scams and obligations in stock exchangesof our country. SEBI has measured various limits till what the movement in one direction cansustain. The limit is imposed to restrict the upward or downward movement of the prices ofshares and scripts up to certain limits only. If the limit was not imposed then ultimately, thestock transaction in particular shares can be seen as manipulated shares and ultimately createsscams. To restrict this either upward or downward unlimited manipulation, circuit system hasbeen imposed in the stock market of our country. SEBI has introduced various stock market circuits for the different levels of prices. SEBIhas divided the restrictions of the trading for certain time (circuit) for different percentages. Ifany stock price or market movement crosses 10% than market trading stops for half hour. Laterif it increase more 5% then trading stops for one hour and if it again increases 5% then marketstops trading for half day only. In case of freak trading, where market reduces by 900 whichcomprises of 16% reduction in market price of S & P NIFTY needed to be closed downautomatically for one hour but the system didn’t trigger and market had not stopped it’s trading. Just to rectify this kind of system mistake, SEBI want to implement one strategy andrestrictive measure where they are targeting of 2% movement of the script or share within twominute time duration. Means if any share or script shows 2% up down in price movement, thenscript should ultimately suspend the transaction in that share or script for few time only. Putting2% trigger in 2 minute will ultimately restrict majority of the freak trading in the market. It alsoprevents massive loss in the market capitalization due to various scams and freak trades in themarket. 24
  25. 25. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES SEBI is under the surveillance of this preventive measure and hopefully these restrictivepractices will be implemented soon in stock exchanges.  Transformation in Infrastructure: - In 1992 Security and Exchange Board act was passed to control the stock marketmovements of the country. SEBI came out with screen based trading system which made tradingso secure and easy. In screen based trading system, majority of the shared needed to format indematerialized format. In the transformation, majority of the brokers and investors needed totransfer to online trading system which ultimately provided faster delivery and transaction instock market. To prevent freak trading in stock market, SEBI is coming out with the issue of onepassword to each trader which ultimately reduces the various trades by single password creatingrestrictions of freak trade in the market. By providing single password to the trader the mistakecan be traced easily and restrictive measures can easily been taken. Thus this transformation ofbetter infrastructure provides various benefits to prevent freak trading in the country. BIBLIOGRAPHY: 25
  26. 26. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES http://www.business-standard.com/article/markets/nifty-dips-15-in-freak-trade-emkay-order- causes-15-min-disruption-112100500107_1.html http://economictimes.indiatimes.com/topic/Freak-trading http://www.goodreturns.in/news/2012/10/05/freak-trade-draws-sebi-probe-145127.html http://www.firstpost.com/investing/emkay-freak-trade-after-crash-exchanges-want-narrower- trading-band-482730.html http://www.mydigitalfc.com/news/sebi-weighs-pause-option-risk-check-foil-freak-trade-364 http://www.moneylife.in/article/nse-freak-trade-fiasco-sebi-rules-out-quick-changes-in-error- trade-annulment-rules/29030.html http://www.anirudhsethireport.com/reliance-freak-trade-sab-chalta-hai/ http://www.livemint.com/Money/72ZCpBiDcvKq75Eu0T8x6J/Trading-on-NSE-halts-reasons- uncertain-dealers.html http://www.firstpost.com/investing/freak-trade-again-nse-probes-decline-in-tata-motors- ultratech-610903.html http://in.reuters.com/article/2013/02/05/bank-of-india-freak-trade-nse-tata-ultra- idINDEE91405220130205 http://www.moneycontrol.com/news/market-edge/freak-trade-to-cost-emkay-rs-51- crtalksbrokers_765857.html http://www.business-standard.com/article/markets/freak-trade-at-nse-rs-3-lakh-cr-erased-in-2- minutes-112100600062_1.html http://profit.ndtv.com/news/corporates/article-freak-trade-in-tata-motors-ultratech-shares- due-to-system-error-religare-capital-317223 26
  27. 27. FREAK TREADING: CHALLENGES AND PREVENTIVE MEASURES http://www.business-standard.com/article/markets/nifty-dips-15-in-freak-trade-emkay-order- causes-15-min-disruption-112100500107_1.html http://economictimes.indiatimes.com/topic/Freak-trading http://www.goodreturns.in/news/2012/10/05/freak-trade-draws-sebi-probe-145127.html http://www.firstpost.com/investing/emkay-freak-trade-after-crash-exchanges-want-narrower- trading-band-482730.html http://www.mydigitalfc.com/news/sebi-weighs-pause-option-risk-check-foil-freak-trade-364 http://www.moneylife.in/article/nse-freak-trade-fiasco-sebi-rules-out-quick-changes-in-error- trade-annulment-rules/29030.html http://www.anirudhsethireport.com/reliance-freak-trade-sab-chalta-hai/ http://www.livemint.com/Money/72ZCpBiDcvKq75Eu0T8x6J/Trading-on-NSE-halts-reasons- uncertain-dealers.html http://www.firstpost.com/investing/freak-trade-again-nse-probes-decline-in-tata-motors- ultratech-610903.html http://in.reuters.com/article/2013/02/05/bank-of-india-freak-trade-nse-tata-ultra- idINDEE91405220130205 http://www.moneycontrol.com/news/market-edge/freak-trade-to-cost-emkay-rs-51- crtalksbrokers_765857.html http://www.business-standard.com/article/markets/freak-trade-at-nse-rs-3-lakh-cr-erased-in-2- minutes-112100600062_1.html http://profit.ndtv.com/news/corporates/article-freak-trade-in-tata-motors-ultratech-shares- due-to-system-error-religare-capital-317223 26

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