The week was dominated by discussions on the freak trade which happened on the NSE on Friday the 5th of October. Very clearly from details which have flown over the last 10 days it appears that a basket of NIFTY stocks were sold by a dealer at the institutional desk of the broker for a quantity which was much more than the ordered quantity. This triggered a false price in the market and in a span of less than 30 seconds; all fifty constituents of the NIFTY index had hit a low of 20%. This should have brought about a shutdown of trading on the NSE cash market because the exchange had crossed the circuit limit of 570 points on the NIFTY and actually touched a low of 900 points. What is surprising is that the exchange continued to deny any system glitch at their end though it clearly appears that the system not triggering a circuit when the NIFTY was down 570 points is certainly a lapse. What is even more shocking is the explanation that 59 orders caused the carnage when the system from one order creates orders for all 50 stocks. This could be treated as one order or 50 orders but the magical and mysterious 59 orders remains unexplainable.
NSE is an exchange which can do no wrong. It is the same exchange which was reprimanded for huge number of code changes to transfer profit and losses in a large number of cases and they denied any wrong doing. It is the same exchange where the Futures list is being pruned sharply as it had violated its own norms of futures when they were introduced. They had said that the basic criteria would be 0.5% of the average daily turnover should happen in that stock. We all know basic mathematics that 100 divided by 0.5 is equal to 200 or that this number becomes the maximum number of stocks in which futures could be introduced at any time. However there is another known fact that the top 50 stocks by trading volume account for anywhere between 70-80% of the traded volume. This futures segment should then have been reduced to somewhere around 100 stocks. Good sense will prevail in course of time when there is meaningful competition available to this exchange.
Whether NSE accepts its system had a glitch or not action taken by the regulator SEBI during the previous week indicates that the regulator believes that there was a glitch. We are all aware that SEBI reacts to events in a slow manner and takes its time to bring about change. In this case the speed with which they have reacted is indeed unheard of. They called a meeting, discussed the same and recommended to the exchanges that the current notional circuit of 20% in stocks included in the benchmark indices and those which have futures would be reduced to 8%. Besides the recommendation, the exchanges have been given seven days to comment on this issue. It appears that by this time next week the new notional limits would have been introduced.
The second issue on which SEBI is now veering around is to the annulment of trade. It wants to create some guidelines when and how trades created in unusual conditions could be annulled by the exchange. There have been instances in the past when globally such instances have been reversed or annulled. This happened in the US when a drunken investor kept on buying crude and pushed prices artificially high. It also happened on the BSE in currency futures. Within India as well the broking community is pushing the exchange that annulment be done and to help the beleaguered broker. The only possible reason why the exchange seems reluctant is the nagging fear that this would amount to admitting that their systems failed. The trading community believes that NSE is at fault and there is a system glitch.
Switching tracks to the markets one finds that in the last week we fell and rose on alternate days indicating a mixed trend and lack of clarity where we are headed. The election results in the by-elections in Uttrakhand and West Bengal are certainly an eye-opener. The seat vacated by the President was won by a margin of 1.22 lacs vote last time. This time around his son managed to squeak through with just 2,536votes. The Chief Minister of Uttrakhand’s son lost the seat vacated by his father by 22,694 votes. These two elections should act as a wakeup call for the scam ridden Congress.
Elections in Himachal Pradesh take place on the 4th of November and in Gujarat on the 13thand the 17th of December. Both these states are ruled by the opposition BJP and these elections could be treated as a referendum for the general elections due in May 2014 as scheduled or earlier. The markets would be choppy and would seek direction from the current result season. Infosys which declared its results on Friday the 12th of October saw its share price drop for the third consecutive quarter after result declaration. The share price dropped a steep 5.2% after the net margins dropped by 160 basis points and the net profit rose over 24% to Rs 2,369 crs. The future guidance in revenue terms did the share in. Results from banking companies HDFC Bank and Indusind bank were spot on and saw the shares end with minor changes.
The redeeming feature is the continuedinflows from FII’s who bought shares worth Rs 3,194 crs while domestic institutions sold shares worth Rs 1,225 crs. The Indian Rupee depreciated to Rs 52.81 against the dollar losing 0.97 paisa or 1.87%. Brace yourselves for a choppy and directionless week with a negative bias.
