Indian Capital market regulator SEBI (Securities and Exchange Board of India) has tightened the dynamic price bands for stocks on which derivative products are available after a set of erroneous orders placed by brokerage Emkay Global on October 5, 2012 led to the Nifty Crashing over 15 per cent within a few minutes of opening.
The regulator SEBI on recently said stock exchanges should set the dynamic price bands at 10 per cent of the previous closing price for stocks on which derivatives products are available, index & stock futures and also on stocks included in indices on which derivatives products exist.
Mechanism of Dynamic Price Bands..!
Now, stock exchanges have a mechanism of dynamic price bands, commonly known as dummy filters or / operating range, which prevents acceptance of orders for execution that are placed beyond the price limits set by the stock exchanges.
Such dynamic price bands are relaxed by the stock exchanges as & when a market-wide trend is observed in either direction a bullish or bearish price movement.
Sebi said in a circular posted on its website, “In the event of a market trend in either direction, the dynamic price bands shall be relaxed by the stock exchange in increments of 5%”
The regulator SEBI has also imposed quantitative limits on individual orders so that errors may not lead to a disruption of trading at the exchanges, such as the Emkay erroneous basket trade. Instead of selling stocks worth Rs. 34 lakh, an Emkay dealer punched in orders that amounted to a Rs. 650 crore sell-off. Within seconds, the market went into a tailspin and his employer Emkay Global was left scrambling for cash.
SEBI said any order with value exceeding. Rs.10 crore per order should not be accepted by stock exchanges for execution in the normal market. Besides, exchanges should ensure that appropriate checks for value & quantity are implemented by the stock brokers based on the respective risk profile of their clients.
SEBI also said, “Stock exchanges are directed to ensure that stock brokers put in place a mechanism to limit the cumulative value of all unexecuted orders placed from their terminals to below a threshold limit set by the stock brokers. Stock exchanges shall ensure that such limits are effective”
The regulator SEBI also said that bourses should ensure that brokers are mandatorily put in the risk-reduction mode when 90 per cent of the broker's collateral available for adjustment against margins get utilised on account of trades that fall under a margin system.
All unexecuted orders will be cancelled once a stock broker breaches its 90 per cent collateral utilisation level. Only orders with ‘Immediate’ or / ‘Cancel’ attributes will be permitted in the riskreduction mode. The stock broker will be moved back to the normal risk management mode as and when the collateral is lower than 90 per cent utilisation level.
Src: ET
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