Flash crash in stock markets: All you need to know?

Classroom

oi-Roshni

By Roshni Agarwal

Published: Friday, October 18, 2013, 10:25 [IST]

Sometimes due to human or technical error in the system, stock of a company or a derivatives contract is traded i.e. bought or sold at a price way above or below the actual market price. The error can be triggered from the end of the broker or trading platform of the stock exchange. Such a glitch directs the movement of the stock index lower by considerable points.

This crash on account of technical or human error that usually results in a number of trades at erroneous price amount is termed as flash crash in the stock markets parlance. Several such errors have been reported in the past in the stock markets across the globe.

The reason for such an error to result could be as simple as wrong entry of figure for either the quantity size or amount. In view of the impairment that such an event results in, SEBI came up with a few rules to eliminate the occurrence of such errors. Also, NSE or National Stock Exchange is likely to step in with moves to counter the repercussions of a major crash or when the index-based circuit breaker is initiated.

For this, as per The Economic Times Report NSE is working on halting any further trading activity in case of such an event in less than 20 microseconds (1second = 1,000 millisecond and 1 millisecond =1,000 microseconds). However, the time as to when such a measure will be implemented is not known.

In India, last such event was reported on 5th October'2012 and the failure to end trading on an immediate basis caused indefinite havoc in the Indian stock markets. As per the directive, stock exchanges in India are directed to enforce circuit breakers in case of fluctuations in index movement at 10%, 15% and 20%. Also, trading activities are required to be suspended on an immediate basis for a specific time-frame.

But, on that particular day, halting of the trading on a complete basis took 6s which caused the already crashed nifty 50 index to fall further. And, as nearly 0.2 million orders/second are reported to be executed by NSE, effects of the termination of the trading activity in a time gap of 6s can only be thought-of.

Goodreturns.in