Prof. Jayanth R. Varma’s Financial Markets Blog

A blog on financial markets and their regulation

Trading Error at BSE, India

Another new listing, another country, another trading error and a strange resolution.
It is much smaller than the Mizuho trade that I have blogged about
here and
here.
But its resolution is utterly strange.

On listing day a trader placed a sell order for about 400,000 shares of Tulip IT Services
Limited at a price of Rs 0.25 at the BSE in Mumbai when the market price was around Rs 170.
Since circuit filters do not apply on listing day in BSE, the trade executed causing a
modest loss of about US $ 2.6 million.

What is interesting is the way that the exchange has
resolved the issue. It says that:

  1. The buy orders at a price higher than Rs.96/- and matched against the said order,
    shall be deemed to have been transacted at such prices at which the trades were executed.
    The cut-off price of Rs.96/- has been arrived at by applying circuit filter limit of
    20% on the issue price of Rs.120/- on the lower side on the lines of the existing
    practice of application of standard Circuit Filter of 20% in the regular market.
  2. All other existing orders below Rs.96/- and which got executed against the said sale
    order will be deemed to have been transacted at a price of Rs.171.15. The said price of
    Rs.171.15 has been arrived at by taking the weighted average price of the
    trades executed at or above Rs.96/- against the said sale order.
  3. All other orders placed subsequent to said sale order and which were matched against
    the said sell order will be deemed to have been transacted at a price of Rs.171.15.

In response my first Mizuho blog, Piyush Mishra
commented
that an erroneous trade is due to “the lack of oversight on the part of the broker/dealer”
I agreed with that and wrote that “By nullifying erroneous trades, exchanges may actually
be reducing the incentives for traders to install and use such software checks.”

I have therefore little sympathy for the BSE bailing out the offending trader by
changing the traded price at all. But putting that objection aside for the moment, the
solution adopted is still perverse. A trader who bought at Rs 97 pays Rs 97 while another
who bought at Rs 95, is asked to pay Rs 171.15. That two traders in very similar situations
are treated so differently is manifestly absurd and unfair. That the person who bid a lower
price pays higher makes the solution even more ridiculous.

I recall a similar situation in the US in 2001. A hedge fund offered to buy Axcelsis
Technolgies at $95 instead of $9.50 on the Nasdaq. Nasdaq cancelled all trades at
prices below an arbitrary threshold of $22 and let the other trades stand. Floyd Norris
wrote (“At the Nasdaq Casino, the Winners Get Stiffed”, New York Times March 2, 2001)
about a day trader who sold into the erroneous trade and then covered his short position at a
profit of $145,908. When the Nasdaq cancelled the trades selectively, this trader found that his
share sales had been cancelled while his purchases stood producing a loss of $130,065 instead of the
profit of $145,908. That the offending hedge fund was bailed out while an innocent day trader was
penalized was clearly absurd. In a scathing comment, Floyd Norris wrote ”Nasdaq looks a lot like a
casino that values a customer’s business only until he starts winning.”

Clearly exchanges can not be trusted with the discretion that is vested in them.
The rule should be very simple. Traders should bear the responsibility (and the losses) of
their erroneous trades.

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One response to “Trading Error at BSE, India

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