The Securities and Exchange Board of India (SEBI) on Thursday announced a series of measures to prevent flash crash. It has asked exchanges to put an upper limit on a single order at Rs 10 crore and also decided to tighten the dynamic price band around a stock that will stretch only 10 per cent either way.

The measures are a response to the possibility of flash crashes like the one which happened in October 5 this year at the NSE.

This means no order of above Rs 10 crore will be accepted by the stock exchange for execution in the market.

The dynamic price band is tighter than the circuit filters that exchanges apply on stock prices daily. The new band will also be applicable on index futures and stock futures.

Sebi has however said that in case of a market trend in either direction, the dynamic price bands shall be relaxed by the stock exchanges in increments of 5 per cent.

“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 per cent of the previous closing price,” said the Sebi circular issued on Thursday.

Market participants say that this sort of limit has come for the first time.

“This is the first time that a dynamic price band has been fixed for such stocks as earlier there used to be just dummy filters which was more like an internal mechanism and an artificial filter and that never halted trade,” said a market source who did not wish to be named.

As a result of the upper limit on single order, the regulator has made it impossible for anyone to avoid the block deal window and route trades through the normal window.

The regulator has introduced minimum pre-trade risk controls for all categories of orders placed on stocks, Exchange Traded Funds (ETFs), Index Futures and Stock futures. While the limit on value of an order has been fixed at Rs 10 crore, the stock exchange will be required to ensure that appropriate checks for value and quantity are implemented by the stock brokers with respect to the risk profile of their clients.

Sebi has also directed the stock exchanges 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.

Stock exchanges have also been directed to ensure that the stock brokers are mandatorily put in risk-reduction mode when 90 per cent of the his collateral available for adjustment against margins gets utilised on account of trades that fall under a margin system. Sebi’s measures and directions are result of a flash crash at Nifty where it fell by 900 points to hit an intra-day low of 4,888 on October 5, 2012. Nifty hit the lower circuit and thereby closing the cash market automatically for almost 15 minutes. The crash was linked to erroneous trades worth $126 million, placed by Emkay Global Financial Services.

Risk checks

* Market regulator asks exchanges to put an upper limit on a single order at Rs 10 crore

* As a result it will be impossible to avoid the block deal window and route trades via normal window

* Decides to tighten the dynamic price band around a stock that will stretch only 10% either way

* Sebi has, however, said that in case of a trend in either direction, the dynamic price bands shall be relaxed in increments of 5%

(Indian Express)