On 17th May 2004, exactly five years ago, when the BJP-led National Democratic Alliance (NDA) failed to return to power after high expectations, the market swooned by 11.14%. On Monday 18th May the market opened up with a humungous gap up when Congress was powerfully voted to power. But whether it is in our joy or sorrow, stock exchanges seem unable to handle extreme price movements. Most market observers expected the Nifty of National Stock Exchange (NSE) to get frozen at around 4039, up about 10% close from the Nifty close of 3672. The Singapore Nifty was already trading 11% higher. However, seconds after the market opened, the Nifty was shown to have hit 4203.30, a rise of 14.4% while Nifty futures was around 4052.80, up a much lower 10%. This meant an unseemly wide gap of 150.16 points. This made no sense. Either the index was wrong or the futures data was wrong. Even the Sensex of The Stock Exchange, Mumbai, was frozen at 13,963.30, up 14.70%, seconds after the market opened.
A 15% move in seconds is not the way the system is supposed to function. The first assumption was the index calculations of the BSE and NSE were wrong because the Securities and Exchange Board of India (SEBI) mandates that a market index cannot move 15% at one go. It is supposed to be frozen 10% up (down) and opened again after a cooling period of 30 minutes. A 150-point gap between Nifty and Nifty futures, frozen at corners of the television screens, mocked the Indian market’s systems, specifically the near-monopoly stock exchange, NSE’s ability to do simple calculations of its index and futures or to put in place systems that work logically under stress. It also mocked at the continuing nonchalance of the market regulator in ensuring that the exchanges function according to preset rules. Around 11 in the morning the BSE put out a bland press release said that SEBI vide their circular No. SMD/RPD/Policy/Cir-37 dated June 28, 2001 has stipulated that the index based market wide circuit breaker system shall apply at three stages of the index movement either way at 10%, 15% (1450 pts) and 20% (1950 pts)… Since the indices breached 15% level, the markets will be closed for two-hours and hence the market will reopen at 11:55 hours.”
This is baffling. BSE is saying that that said since the market hit 15% straightway it was frozen at that level. The question is why did it hit 15% straightway? When prices shot up, why were they not automatically arrested so as to ensure that the Sensex was frozen at 10% up. At least BSE has been quick to put out a release. The NSE, as usual, was mum especially about the ridiculous divergence between Nifty and Nifty futures.
What is worse, this is not the first time it has happened.
In January 2006, the NSE failed to adjust the market capitalisation of Reliance Industries when the stock commenced trading as a de-merged entity. Following the incident, SEBI insisted that the NSE appoint a committee to audit its systems. On 19th January 2006, the Nifty spot price showed an exaggerated fall of nearly 100 points when the regular trading session started, about an hour after the special trading session for price discovery in Reliance Industries ended that morning. The exchange admitted the error and corrected it about a couple of hours later. Obviously, nobody has learnt a lesson. One wonders what happened to the committee ordered by SEBI and what corrective actions, if any, had been initiated at that time? Will SEBI revisit the issue now?