Exclusive: Sebi may soon reveal plan to end fat finger errors

Market Regulator Sebi and exchanges are working on a mechanism to deal with the fat finger error issue. Zee Business learned from sources that the issue was discussed recently with the stakeholders. A fat finger error is an input error while placing orders to buy or sell shares. Under the proposed mechanism, there will be a narrow price range within the broader intraday range of 2-20 per cent applicable on stocks in the cash segment. This additional price range may be called the volatility control band and will be a certain percentage of the last traded price (LTP), applicable on very small intervals of say every 15 or 30 seconds. This additional price band, within the very small time interval, may be useful in dealing with issues of fat finger errorr or erroneous single-entity orders.  

For instance, let's take the example of a scrip whose previous day closing price is Rs 200, and today’s pre-opening lower and upper bands are placed at Rs 180 and Rs 220, respectively. In the pre-opening session, the stock trades at Rs 200, the volatility control band is 5 per cent, and the period for recomputing is 30 seconds. At the start of the day, the volatility control band will be Rs 190-210. In this case, all buy orders will be accepted in the range of Rs 180-210 and all sell orders will be accepted from a higher price band of Rs 220-190.

Similarly, the price will be recomputed after the next 30 seconds and this will continue till the end of the session. Assuming the last traded price at 09:15:30 is Rs 230, the volatility control band between 09:15:30 and 09:16:00 will be Rs 218.5-241.5.    

#ZBizExclusive: फैट फिंगर एरर की गलतियों को रोकने पर एक्सचेंज और SEBI बना रहे हैं प्लान।

कैसे रोकी जाएंगी ऐसी गलतियां? बता रहे हैं ब्रजेश कुमार। #SEBI #FatFinger #Error #StockMarket @BrajeshKMZee pic.twitter.com/5EwLjqUCtC

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In the volatility control band mechanism, any order placed beyond a certain percentage of the price range will be automatically rejected by the exchange system. But there will be flexibility also for major or sudden news events because, in the event of news flow, many participants would like to trade beyond the defined price band. In that scenario, exchanges will take a call based on, pre-defined criteria, like the number of rejections of orders beyond the volatility control band in that period window, the number of unique client codes, and unique trading member counts of such rejected orders. In this scenario rejected buy orders would imply orders above the upper range of the volatility control band and rejected sell orders would mean sell orders below the lower variable control band.

But intended outcomes are also expected in this mechanism, as there could be an order book entering a freeze state in illiquid scrip on account of best bid/ask orders resting outside the volatility control band and the reference price not getting revised on account of lack of liquidity. So in that case, exchanges will have to identify such situations and devise a mechanism that releases the order book from the freeze state.

It is suggested that initially the volatility price band should be applied to the stocks having a daily price band of 10 per cent or above, so that if a smaller price band within the larger band is applied, it does not create an issue.  

Sebi also wants all exchanges to have uniform measures to deal with volatility, presently each exchange, based on their assessment adopts measures. Also, Sebi believes that going forward the variable control band of the cash and futures segment needs to be aligned.   

An email sent to Sebi did not elicit a response.