Options trade: Institutional client behind the fat finger error

MUMBAI:  Preliminary facts emerging from the fat finger error that occurred on June 2 suggest the loser on the trade was an institutional client who punched the erroneous order through direct market access (DMA), while a couple of proprietary traders were among the gaining counterparties, informed sources told TNIE. 

DMA is used to describe the clients who have direct access to the market using the computer-to-computer software of a broking member and routing orders through a broker’s infrastructure. These clients tend to be large and with deep pockets. 

While there is no indication of NSE annulling the trade, which led to the client losing Rs 250 crore in minutes, the Association of National Exchanges Members of India (ANMI) seeks to hold a meeting with the NSE as early as Monday and subsequently with Sebi to scout for a solution that could prevent such trades from occurring.  Attempts to contact NSE and Sebi officials for comment were unsuccessful.

Kamlesh Shah, president, ANMI, told TNIE that proposed discussions would centre on issues like rationalising the daily price range and on possibly disallowing trades placed far away from the reference or last traded price of an underlying asset.  Rajesh Baheti, former president, ANMI, proposed that against annulment, a settlement, if permissible under exchange bylaws, could involve the loss-making counterparty being allowed to square off the trade around 10-20% below the option’s last traded price to mitigate part of his losses. 

The client inadvertently sold 25,000 lots of a 14,500 call option on Nifty for a few paise per share (50 shares make one contract) against its price of Rs 2,130 a share, causing the option to tank to 15 paise intraday before closing at Rs 2130 mark. It is believed that prop traders’ sniper algorithms that seize price discrepancies activated buys at the low levels and as the price began rising back up sold the contracts, making a windfall gain due to the error. Their gain was client’s loss as he had to buy back at high levels what he sold at 15 paise to square off his trade. 

NSE, in a circular today, said, “(the) exchange continues to observe instances whereby few trading members are placing orders on the exchange platform at prices, which do not reflect the current price and are far from the last traded price/reference price /theoretical price…Members are advised to desist from …executing transactions that, prima facie, appear to be non-genuine on their own account and/or on behalf of their clients and refrain from indulging in practices that lead to aberrations in the order book.”

No indication of NSE annulling the trade
While there is no indication of NSE annulling the trade, which led to the client losing `250 crore in minutes, the Association of National Exchanges Members of India seeks to hold a meeting with the NSE as early as Monday