The BSE cancelled all futures trades in its recently introduced derivatives segment, on Mahurat Trading on 26 Oct.
It was rumoured that using algolrithm trading methods-high frequency intra-day trades using software-a Delhi-based broker had played havoc with sensex futures. While the low for the day in sensex futures was 14,000, compared to the sensex close of 17,289 in the cash segment, the average price for the broker was about 15,000. It was said on the Street that if the trades in derivatives were not annulled, the loss to this broker alone could have run up to as high as Rs 100 crore. The segment's turnover was rumoured to have been Rs 27,000 crore, compared to BSE's recent high figure of about Rs 500 crore.
You can bet your derriere that if you or I had done something silly like this, no one would have come to our rescue. But yes, if a broker loses 100 cr. due to his OWN mistake, they’ll cancel all trades – and if by any chance you had made a profit buying from him and then selling later, sorry, but that’s cancelled too.
I hope algorithms will keep this in mind for subsequent trading.
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First of all, is it legal to annul an executed trade in this manner? If yes, I guess we should probably start avoiding BSE. Can this kind of things happen in NSE as well?
10.28.11 at 6:01 PM
So Warren Buffet was proved right “Derivatives turned out to be Financial Weapons Of Mass Destruction” :-)
There was no change of the trades done on the cash segment of the bourse.
10.28.11 at 6:38 PM
Reading this reminded me ““If you owe the bank $100 that’s your problem. If you owe the bank $100 million, that’s the bank’s problem.””
10.28.11 at 6:39 PM
Rule 1 : Test
Rule 2 : Test again.
Rule 3 : If you start seeing your software behave funny and rake huge losses, turn off the program.
Now, what happens if there were other algos doing arbitrage trading ? E.g. buying in BSE Sensex in future and shorting the BSE-30 basket in cash ?
Since no trades were canceled in cash segment, these guys would get screwed.
10.28.11 at 8:24 PM
@Saravanan : Everything is legal.
Remember, BSE was opened on June 12, 1998 around 11.50 pm (midnight) to facilitate brokers to square off trades and avoid payment crises and as a result Sterlite and Malco (Madras Aluminium) were banned by SEBI because of this.
10.30.11 at 7:32 PM