In today’s Finshots we talk about SEBI’s new plan to save investors’ money from tech glitches.

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The Story

It’s Wednesday ― February 24th, 2021.

10:06 a.m.

NSE exchange feeds stop working across all brokerage firms in India.

What are NSE exchange feeds?

Well, if you’re going to buy and sell stocks, you need to know who’s buying what at which price. And if you’re a stock exchange that facilitates these transactions by bringing buyers and sellers together, then you have an obligation to relay this information to all the participants in the market.

In this case, it’s the National Stock Exchange’s (NSE) job to facilitate this flow of information. But as we noted, the feeds stopped working.

Then at 11:40 am, NSE halts all trading.

At this point investors are freaking out, because they have no idea where their trades are headed and they’ve no way of getting out of this position. There’s pandemonium in the streets.

The uncertainty lasts 4 hours — one of the longest market halts of all time in India’s stock market history. And during this time, stock brokers are forced to take drastic action.

Why stock brokers you ask?

See, a customer rarely interacts with the stock exchange directly. Instead they interact with stock brokers who then liaison with the exchange to facilitate all transactions. They’re the customer facing institutions. So when trading stopped (as it did in this case) customers naturally vented their frustration at the brokers. The brokers sought information from the NSE on how best to proceed. But as Zerodha (India’s largest stock broker) pointed out in this blog post, that information wasn’t forthcoming, at least not in a timely manner.

And as a consequence, brokers had to take drastic action. See, many customers had already had open positions. Meaning they were in the middle of executing a trade. But once trading halted on the NSE, they were paralysed. If the brokers also hadn’t intervened, some of these trades would have ended very badly. It would have had massive consequences for many customers. So brokers decided to square off certain trades (reversing the transaction by assuming a new trade on a working stock exchange.  In this case, the Bombay Stock Exchange) and alleviate some suffering at least.

But then around 3:17 PM, NSE abruptly informed all brokers that they would open trading at 3:30 PM and extend trading session from 3:45 PM to 5 PM, offering customers the opportunity to exit their trades. But for many customers, the damage had already been done.

It was a mess. And it left a very bad taste. And the market regulator SEBI sought an incident report from NSE on what really happened that day.

So what happened that day?

Well, on February 26, 2021, NSE released a report stating this — “NSE has multiple telecom links with two service providers to ensure redundancy and we received communication of instability of the links from both the service providers. While there was no impact on the trading system, the instability of telecom links mentioned above resulted in an impact to the online risk management system.”

In simple words they’re saying that their risk management systems stopped working because both telecom providers who powered their primary and the backup site glitched simultaneously. And they glitched because of instability precipitated due to digging and construction activity along the path between the two sites.

Wow!!!

And this is bad news any way you look at it. Every day NSE processes 2 crore trades (worth over ₹52,000 crores). Imagine the impact it can have on investor confidence if systems can fail so easily and stay offline for 4 hours. It’s bad.

Now in this case, the systems failed at the end of the exchange. But systems can also fail at the broker's end. And customers can be stuck for long hours. So SEBI has finally decided to have another fail safe measure to alleviate investor stress. They’re now asking exchanges to set up another platform — Investor Risk Reduction Access (IRRA) Platform —  entirely independent of any redundancies they already have. This will offer customers another exit point. Meaning if the stock broker fails, then exchanges can offer customers the option to switch to IRRA and exit their trades here independent of what’s happening at the brokers end. And if all goes according to plan, the customer can take evasive action, switch to IRRA, and finally switch back to the regular platform when the broker gives the all clear.

It could save money. It could save time. And it could prevent a lot of pain.

But there is one question that still remains — “How will this system work exactly and will it be an expensive affair”

Well, we don’t know quite yet because details are still scant. But when we do get more information, we will write another story.

Hopefully this is a sign of things to come. Good things!!!

Until then…

Correction: The earlier version of the draft maintained that IRRA is an additional recourse for investors in the event the exchange fails. However, the platform was envisioned to offer customers an exit point in the even brokers fail. The error is regretted.

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