»Fast Profits Daily by Equitymaster

On This Day - 26 FEBRUARY 2021
NSE Glitch: Why Did the Market Go Up?

Vijay Bhambwani, Editor, Fast Profits Daily

As you know, on Wednesday, the NSE shut down trading in the morning. Trading resumed only in the late afternoon.

The technical glitch caused panic among traders. Yet the market went up.

In the past, such instances have always caused market crashes.

But this time was different.

As traders we are interested in, more than anything else, the price. So why did stock prices go up on such a day?

In this video, I want to offer my two bits as to what I think could have happened.

Let me know your thoughts in the comments.

Hi, this is Vijay Bhambwani and as a trader, I am sure we are all a little taken aback, if not shell shocked by what happened on Wednesday on the NSE due to the technical glitch.

As I record this video on Thursday morning, it's been less than 24 hours since the glitch occurred and we have very few details to go by. The SEBI, or Securities and Exchange Board of India, which is the counter part of the Securities and Exchange Commission in the US has asked the National Stock Exchange to conduct an investigation and find out what really went wrong.

The NSE is doing all it can to conduct this in-house investigation. Details are awaited but what really happened based on the sketchy details and more importantly, why did the market shoot up on a day when traders should have been frightened out of their wits and there should have been panic and pandemonium in the markets?


In this video, I want to shed light on what happened and offer my two bits as to what could have happened. You see, as a 360 degree worldview trader, it is important for me to find out the cause so I can estimate or even guesstimate, guessing and estimating how long the impact of the cause will last. I can then take positions on my trades, or maybe not even trade accordingly.

Now you see on 11.40 am on Wednesday, the NSE realised there was a glitch. They announced that they are doing all they can to sort the issue out, and the initial data that we have is that this was a failure of the telecom link, which it has from its servers.

Now, if you go through the NISM, the National Institute of Securities Market, which is the educational wing of the Securities and Exchange Board of India, or SEBI, which conducts all the certification examinations, etc, of market participants who want to deal in various categories as back office, front office, mutual fund distributors, brokers, etc, each course has his own coded kind of category, and one of them is market operations and risk management.

Now, I have been visiting faculty for some of these courses and I've gone through the textbook of market operations and risk management etc. What comes across is there are mirror sites, there are back up infrastructure in place so that if one set of intra or servers break down, the other set of servers is immediately brought into play.

Everything is duplicated, if not triplicated, so that if one set of infrastructure fails the other one can be brought into place. I am sure the NSE will have a valid reason for what really happened that all their backup plans did not really work.

But why did the market go up? As traders, you and me are concerned with what happens to the price Now, here's my two bits based on the evidence that I have, and based on the information that I have collected primarily from the press statements from SEBI and NSE's own Twitter handles and the statements that they have given basically on television.

So what really happened was that as the glitch was basically acknowledged and it was in the public domain, a lot of brokers started squaring up orders of their clients. I tell you what the intraday traders do and I speak as a participant.

You might give 100,000 or Rs 1 lakh to your broker and the figure is absolutely hypothetical so bear with me. You might give 100,000 to your broker as a deposit or a span margin or whatever you want to call it, and you might be needing 100,000 or Rs 1 lakh to trade one lot, which is fair enough.

But on an intraday basis, the broker allows you certain limits, which are over and above the NSE specified limits. Some brokers allow you 2X. Some allow you 3X. Some allow you 4X, but the condition being that these trades, if you do not square them up before the market shuts for the day, these trades will be automatically squared up by the broker's back office and their terminals at least 15 to 20 minutes before the market is about to shut.

If, on this super leveraged trades, your mark to market loss exceeds a certain figure, now this varies from broker to broker, but let's take a hypothetical figure of 75%. If 75% or more of your mark to market loss, if you mark to market losses exceeding 75% of the base capital that you have given to the broker, even then, the broker is authorised to square up your trades even though it is not yet approaching the last 15 minutes of trading session.

Now, brokers have taken a blanket approval from you. So please read your account opening form with your broker. You will realise that your broker can square up your trades any time he or she feels that there is a threat of default or a possibility of payment default on your part.

Now there is a facility called inter-exchange inter-operability. What it very simply means is that in the good old days or the bad old days, depending on which side you're looking at the coin from, there was something called arbitrage. Here is the BSE. Here is the NSE. The price on the BSE used to be different from the NSE. So people in order to capitalise on the price difference, used to buy from the exchange where the price was lower and sell on the exchange where the price was higher.

Of course, this was done by people who had ready delivery of the shares because the pay in and pay out system of these exchanges may not really facilitate a smooth trade. So people sitting with ready delivery would not wait for the payout of shares from the exchange, where they bought. They would give delivery to the shares of the shares that they sold on exchange to, from their stock of shares itself and play on the difference in prices.

But now, what you can do is you can buy on the NSE and sell the same shells on the BSE, which is called inter-exchange inter-operability.

Now the brokers, realising that the market had shut down on the NSE and anything could happen, simply put risk management into place and started squaring up the open trades, especially the trades where they thought there would be losses or potential payment problems from clients and they knocked them off on the BSE. This resulted in a huge amount of price volatility, number one.

Number two, when the NSE opened for trade, and by the time they had already announced that all pending orders would be cancelled, the first thing that came to my mind was the guys who had gone short.

Now remember, there are people who are stacking. By stacking, I mean you're allowed to have say one layer of trades. You're stacking 1, 2, 3, 4, 5 layers of trades because of intraday limits allowed my own broker. We professional traders called this process of multi-layering as stacking. You could call it layering. You can call it stacking. You can call it laddering. Call it what you want, but the principle is very simple.

You don't have enough money because the money you've given is small. You are basically super leveraging. Not only leveraging but super leveraging your trades. So the brokers felt a threat perception and once the pending orders were taken out, do remember that even the stop loss orders would have been taken out.

Now, therefore, once the market opened on the NSE and remember, this was a very unique kind of a trading session where trading actually began once actually speaking, the routine market trading session would have ended and it went all the way up to five pm.

Now people of flummoxed, confused, and confounded as to why the market went up on a day when there was pandemonium and the system actually broke down. In the past, whenever these kind of breakdowns, glitches, and snags have occurred, the markets have fallen because there's panic and fear based selling. Here the pending orders were cancelled, which means stop losses were out and the bulls needed to buy just a little bit to basically panic the bears into covering the shorts at whatever prices they were available at.

Remember multi-layering, stacking, laddering, call it what you want, these guys were panic driven. Their losses on their short sales were huge. I wouldn't be surprised if a whole lot of short sellers have lost their shirts, their pants, and even their underwear yesterday.

So the lesson to be learned from this is it takes a very, very savvy and experienced trader to go into stacking or multi layering or laddering. It's not for the uninitiated. I'm basically alarmed by the amount of leverage being taken up by newbies and people who just started trading after the lockdowns were imposed.

The fact that they are making money in trading using stacking and multi-layering of their trades and super leveraging their trades, they think they have cracked the code. They have found the secret of the market to make money and because it's giving them money repeatedly, they think it's a valid system. Do not get lulled into the fact that you are taking risks far beyond the levels where you are comfortable or even capable of taking.

Now there is a measure that I talk about in my videos and in my articles, which is called Jensen's measure. Very simply put, all hedge fund managers use this and I love hedge funds. I have dreams of having my own in house hedge fund someday. I study hedge funds, and I study the way they take their risk and why importantly, hedge funds go belly up or bankrupt. It's because they ignore the Jensen's measure. The Jensen's measure is a statistical tool, and I love statistics. I deploy a lot of statistical trading model into our own trading.

Now, the Jensen's measure says if you are taking one additional unit of risk, it should give you a minimum of two additional units of reward. Otherwise, that risk is not worth taking.

Now, when your multi-layering or stacking your trades one after the other, you're building a house of cards, and yesterday, the house of cards of the short sellers simply crumpled under the breeze. This is what we know as of now, from the sketchy details that we have from the NSE and SEBI.

If it all there is in Is anything substantial coming my way, I promise you I will update you because there are trading lessons to be learned for traders like us. I am open to the fact I am admitting to the front that I resort to stacking but at the same time, I would caution you against doing so unless you are deep pocketed, you can bear the losses, should these losses occur for whatever reason.

Do remember that a couple of decades ago, the NASDAQ stopped trading or it was forced to stop trading because a squirrel chewed off a power cable. Stranger things have happened. So do remember the Jensen's measure. Before taking an additional unit of risk, you must calculate whether you're going to get at least 2 X unit of a reward. Otherwise, that risk is not worth taking.

On this cautionary note, I bid goodbye to you in this video not before reminding you to click like on this video if you liked what you saw. Please subscribe to my YouTube channel if you haven't already done so. In the comments section, do let me know what you think of this video and click on the bell icon to receive instant alerts of fresh content being put up here on my playlist.

Help me reach out to like-minded traders by referring my videos to your family and friends. Friends, I wish you a very profitable day ahead. Vijay Bhambwani signing off for now. Thank you for watching. Take care. Bye.

Warm regards,

Vijay L Bhambwani
Vijay L Bhambwani
Editor, Fast Profits Daily
Equitymaster Agora Research Private Limited (Research Analyst

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