Friday began normally and the markets were chugging along with minor losses. At 10.40 am there was a trade triggered by algorithm which saw Infosys futures make a low of Rs 1,950 when the market price was Rs 2,400. The stock price bounced back in minutes and it appeared that this incident was unlikely to affect the day’s trade. How wrong we all were. Come 2.30pm there was a big hit on the NSE Futures this time. The current level was around 5,330 on the Nifty and about 5,300 the level of Nifty. There was yet another algorithmic order placed which saw the Nifty futures touch a level of 5,000. It sure affected the markets as it led to selling pressure and though the markets recovered substantial ground, the confidence of the market was shaken. It sure puts the stability of the market at stake when such programmed trading is done.
The weekend saw this subject being discussed at various places. Even I did some homework to find out who what happened. It appears a dealer at a foreign brokerage had to match a large order in Nifty. He place the order through an algorithm and the matching order was also placed but the timing of the same was a split second later. This difference of a split second saw multiple stop losses being triggered across the system and caused a near panic as the Nifty futures lost more than 6.5% in a couple of minutes.
Algorithm trade is allowed in the country but still is being viewed with a lot of scepticism world over. There have been instances of such trades leading to flash attacks on the exchanges where they are traded. Let us for a moment assume that instead of a genuine trade somebody punches a rogue trade. Imagine what havoc it could create and who would be responsible for the subsequent damage that it could cause to the exchange and the trading system. Let us assume another case where two different traders or dealers put different orders at the same time in the same stock or index. There could be a couple of second’s difference between their executions and as ‘algo’ trades seek pockets of liquidity they could attack the same pocket and technically cause price destruction.
One does not want technology to be taken away but if it can destabilize the marketplace one needs to be sure that a handful of people should not be allowed to rule the way markets behave. The two examples that happened on Friday and the one which happened in Mini Nifty in the first fortnight of April are indication of what Algorithm can do to the market. One hopes the exchange and the regulator take serious note of the same and bring in safeguards to protect the sanctity of the markets.