PowerPoint Presentation

EMKAY GLOBAL

2014C01 Rahul Singh Baghel

2014C02 Ridhhi Sanghi

2014C19 Vani Saksena

2014C39 Akshita Kedia

2014C41 Anirudh Rangarajan

2014D09 Munish Sharma

About Emkay Global

Founded in 1995

Offers comprehensive Investment solutions to more than a lac satisfied customers throughout the length and breadth of the country.

Current net worth Rs 130 crore

350 retail outlets, spread across the country.

Membership - BSE, NSE, MCX-SX, CDSL, NCDEX, ICEX, NSEL.

What Exactly Happened?

Oct 5, 2012 The market opened normally and Nifty opened at 5,815

When the markets were expected to keep going up forever because we have new reform agendas, the markets went curiously the other way.

Stunned traders watched the index fall over 10% no, 15%. Down to 4888.2 from a close of nearly 5800 the previous day.

What Exactly Happened?- A Fat-Finger Trade

At 9:50:58 AM, the Nifty circuit filter got triggered, upon which the cash market was closed automatically

The Nifty fall was apparently on account of the entry of59 erroneous orders.

These orders were entered by a trading member at Emkay Global Financial Services, on behalf of an institutional client which resulted in multiple trades for an aggregate value of over Rs. 650 crore

Thesenon-algomarket orders have been entered for an erroneous quantity which resulted in executing trades at multiple price points across the entire order book, thereby causing the circuit filter to be triggered

The operating phrase here is "non-algo" meaning these were trades that were not algorithmic

How does NSE know?

It asks algorithms to only send their orders with a code that identifies them as algos. And every algorithm must be approved by NSE

While the Exchange systems functioned normally without any glitch, the above abnormal trades caused market closure automatically, due to the index circuit filter getting triggered.

The market was reopened by the Exchange with a pre-open phase at 10:00:22 AM and trading resumed at 10:05:00 AM and the market functioned normally

What Exactly Happened?- A Fat-Finger Trade

Emkaysofficial response

While executing an order to transact a Nifty cash basket, in Nifty-50, a dealer committed a bona fide error. The error was in entering the value of the order as the quantity ofNifty-50 basket to be transacted. The order got transmitted to the NSE trading server as a single large Nifty basket order comprising of nifty 50 stocks. Immediately on realizing the error, we promptly got in touch with the NSE and kept in touch with them to co-ordinate all future course of action until the entire erroneous outstanding position was closed out.All our remaining clients outstanding positions are intact and we will continue to service all obligations. We are hopeful that this obvious and apparent error would justify the annulment of these trades, and believe in the NSEs professional management to see the merits for annulment, which is the practice worldwide. The NSE has disabled trading for us to facilitate investigations and primarily to prevent any further exposure until this settlement is completed

Financial Impact

The error was caused by a dealer at the brokerage, which faces a Rs 51-crore hit, equivalent to its net profit for the past six years

While Emkay, which made repeated representations for cancellation of the trades, will have a significant part of its cash balance wiped out, a set of investors who had punched in 'buy' orders made windfall gains as their trades were executed after the market crashed due to the error

Financial Impact

Volume Doubled

The volume of stocks in the benchmark index that were traded almost doubled from the 100-day average, according to data compiled by Bloomberg. Anindexof Indian stocks traded in New York slipped as much as 1.2 %

Shares Plunge

The brokers shares plunged by the 10% daily limit to Rs. 31.1

About 20 stocks in India saw declines of 9 % or more on Oct. 5, compared with the more than 300 securities that lost at least 60 % during the flash crash before the trades were canceled.

The decline and rebound in the Nifty lasted seconds, compared with more than 15 minutes for stocks, futures and indexes in the flash crash

Preventive measures

Since the trades were on the Nifty index, which has 50 stocks, its very surprising that there were 59 orders that were "rogue" a basket order should only send in 50 orders, or a multiple, even if it was a fat finger

WAS THIS LEGAL?

Of course! An order of that size SHOULD bring the market down, fat finger or otherwise. The thing that helps is circuit breakers, and the Nifty circuit helped

Dynamic circuits can operate intelligently parallel to the market, ensuring that large market orders are rejected at the fringe, with a mandatory minute or two of a hold before they open up further

A stock that needs to fall due to fundamental factors will take about a half hour to fall 80%, if it really should and the wait is indeed a good thing.

Legal aftermath

"The panel feels gross negligence by a single member cannot be allowed to impact 60,000 trades executed by 14,000 clients of 665 exchange members"

It was found that Emkay lacked adequate risk management systems that could have blocked the erroneous order from being executed and did not avail of a order cancellation facility provided by the exchange to annul the trades on the same day.

Emkay now faces the prospect of paying Rs 51 crore to counterparties to the erroneous trade, which dragged down the Nifty by 15% in a matter of seconds.

Emkay had two counterparties to the erroneous trade Prakash K Shah Shares & Securities and Inventure Growth & Securities

Emkay and Inventure have been fined Rs 25 lakh each and PK Shah Rs 20 lakh.

THANK YOU