India starts probe after "flash crash" Indian authorities are set to tighten trading rules as part of a probe into last week's "flash crash," which briefly wiped close to $60bn from leading equities and heightened investor concerns about fragile markets in Asia's third-largest economy. The Securities and Exchange Board of India announced the investigation after the Mumbai-based National Stock Exchange's "Nifty" index of leading shares fell almost 16 per cent in a matter of minutes last Friday, following an erroneous trade by a local broker. IN FT Trading Room That a so-called "fat finger" manual error caused the plunge, rather than an automated algorithm, has provided some relief to market observers given global concerns over ultra-fast computer trades following a crash in the US that wiped about $850bn from the Dow Jones index in May 2010. But even with the prospect of tighter controls, many analysts say the episode raises troubling questions for India's nascent markets, specifically over who is to blame and whether any mooted reforms would stop a repeat occurrence. Friday's drama began at 9:49am local time, when the NSE, the larger of India's two main bourses, saw shares drop sharply after broker Emkay Global accidentally placed dozens of sell orders worth Rs6.5bn ($125.7m). Although Emkay quickly admitted its misstep, it is yet to explain the nature of the error, which is understood to involve a data entry mistake, confusing the price of shares to be sold for the volume - resulting in a much larger trade than intended. The resulting fall automatically shut the market, which remained closed for about 15 minutes. The NSE was quick to apportion responsibility. "The exchange systems worked exactly as they are supposed to," says Chitra Ramkrishna, the joint managing director of the NSE. What really happened is a front end error by the broker. Emkay has certainly suffered for its bungle, losing what some observers estimate could be more than $10m in the process of closing its positions, while also being suspended from trading. Yet Professor Venky Panchapagesan, an expert in market structures at the Indian Institute of Management in Bangalore, says the episode highlights other problems, not least weak enforcement of existing pre-trade regulations, particularly relating to terminal order limits that should stop such obviously mistaken trades. Other observers point to underlying concerns about weak liquidity in a market where most shares are thinly traded, making India unusually vulnerable to such mistakes. "If there is a silver lining to last week it is the renewed focus on India being among the least liquid of the world's leading markets," says Saurabh Mukherjea, head of equities at Ambit Capital, a Mumbai-based brokerage. Large orders are notoriously difficult to execute here . . . When we get large orders to fill it almost causes as much misery as happiness, because we know we'll have to work like maniacs to fill them. The crash is also undoubtedly an embarrassment for the NSE, which has won a dominant market share in India in part because of its reputation for operational efficiency and superior technology - with some analysts saying the bourse must take its share of the blame. The systems at the exchange didn't work at all. The NSE is meant to shut down at a 10 per cent fall, and it didn't. Clearly some form of speed breakers are now needed," says Sandeep Parekh, the founder of Finsec Law Advisors and a former senior official at SEBI. The NSE's Chitra Ramkrishna says operational issues explain why the market continued to fall to 16 per cent after the automatic cut-off had been breached. "The second it hits 10 per cent the market stops accepting new orders, but there are always orders in flight," she says. But in a millisecond you will have thousands of orders that have already gotten through the gate prior to the market stoppage and they will need to complete their execution. Finsec's Mr Parekh is unconvinced. "I don't see this as an excuse at all," he says. If you can't handle milliseconds, don't have milliseconds. The regulations are clear. To shut at 10 per cent means to shut at 10 per cent. SEBI declined to comment on its investigation, but those familiar with it say more stringent checks on brokers are under discussion, as are new interim filter mechanisms for the exchanges, potentially providing an early warning if markets fall sharply, say about 8 per cent. Yet the new air of caution in Indian markets may have wider consequences, too, prompting nervous regulators to slow the development of other innovations, including algorithmic computer trading. "The worst negative externality of all this will be on the algos, given this could well cause the regulator to put greater brakes on them as well," says professor Panchapagesan, a move he says would do little to stop a repeat of last week's events. The basic problem is there needs to be stronger oversight that is enforced. Giving guidelines is not enough.