The National Stock Exchange (NSE), which is the world’s largest futures exchange in terms of the number of contracts traded, had a technical defect on February 24 that went public for hours. This is an attempt to answer all the important questions about a technical issue and its effects on investors and operations.
Simply put, a technical problem can be a problem with an exchange’s hardware or software, or even its connectivity links with brokers, which can affect normal trading activities. This is becoming increasingly important, as stock trading is completely electronic and one problem can potentially affect millions of investors and billions in terms of investor wealth. There are several reasons for a technical problem. For example, an exchange might have upgraded its systems, and compatibility issues suddenly arise on the broker side. A new security patch can have server issues that affect business systems. Sometimes migrating to new business software can also lead to issues and then hardware and connectivity issues. The large network of brokers is connected to the exchange via links and satellite servers, and any kind of malfunction of the links can also create problems. In today’s world, the basis of all commerce is its technological aspect and it must be remembered that no company is immune from these risks.
According to NSE, the problem was due to problems with two telecom service providers. “NSE has multiple telecom links with two service providers to provide redundancy and we have received information from both telecom service providers indicating that there are problems with their links due to the impact on the NSE system. We are working to restore the systems as soon as possible. With this in mind, all segments were closed at 11:40 am and will be reset as soon as the issue is resolved, “NSE said in a statement. Market participants and investors have questioned the length of a trade freeze, especially when mandatory exchanges require standard operating procedures to deal with such situations.
Ideally, trading should not be interrupted for long if there is a technical problem. India’s legal framework has incorporated clauses related to business continuity plans and disaster recovery mechanisms for sharing. Both BSE and NSE have disaster recovery sites that should be activated automatically if there is a problem with the main site or servers. By the way, the SEBI Financial Market Authority rules stipulate that stock exchanges must process one-day quarterly live transactions from disaster recovery locations to find potential loopholes. Exchanges also regularly conduct simulated transactions from disaster recovery locations. Ideally, therefore, trading should resume shortly after problems affect the main servers or the connectivity links between the main exchange servers and the brokers.
When trading is stopped due to a technical problem, investors are affected because they cannot buy or sell shares. If an order is executed before an error causes a stop, the exchange and the clearinghouse are obligated to continue trading. The hard part is the millions of unfulfilled orders that are pending in the trading system at the time of failure. Investors could lose money in a scenario where share prices fall as trading resumes. More importantly, the stop loss could also be triggered in such a scenario. There have been cases in the past where pending orders were canceled before trading was resumed. So we will have to wait and see how pending orders will be processed on Wednesday.
SEBI is the regulator of the Indian financial markets and therefore plays an important role in preventing these problems. It is common for SEBI to request an exchange status report after such a technical problem. In the past, SEBI has also established committees with a specific mandate to define standard operating procedures for such situations. To be fair, while no company is immune from these problems, the regulator has an important role to play in ensuring that these problems are widespread and rare in Indian financial markets.