The Securities Appellate Tribunal recently passed an order in relation to an erroneous order which was placed by a dealer at Emkay Global Financial Services Limited. The dealer placed an order to sell 17 lakh NIFTY 50 units, worth Rs. 980 crores, instead of an order worth Rs. 17 lakhs. Before the error was noticed, the order had entered NSE’s trading system and a substantial portion of it was executed resulting in the fall of the NIFTY index by 15.5% on 05 October, 2012. While rejecting the request of Emkay Global for annulment of the trade, NSE’s Disciplinary Action Committee imposed a penalty of Rs. 25 lakh on Emkay Global.

On appeal before SAT, it was argued that the trade must be annulled on the grounds that the erroneous sell order constitutes a ‘material mistake in trade’ under the NSE Byelaws. Clause 5 of the NSE Byelaws states that dealings in securities on the exchange are inviolable and may only be annulled there has been a ‘material mistake in trade’. The Tribunal observed that the object of clause 5 is to ensure sanctity of the dealings on the exchange by making the trades inviolable and not to give relief to a trader who didn’t exercise due care and caution. They strictly interpreted the clause to mean that annulment may only be permitted in case of certain unforeseen circumstances, not merely when the trade was executed by mistake or merely because it led to huge financial loses.

This strict interpretation places an onerous obligation on traders and sets a penalty for a mistake far higher than what is allowed in the international markets. Further, international markets allow easy reversal of erroneous trades.

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Date:September 29, 2015