Investing is an
observational science
i.e. We cannot run controlled experiements and see what happens.
Sometimes, a natural experiment takes place and we get to see some of
the market mechanisms.
Nifty flash crash of October 5 offers
just such an opportunity for a data driven investigation. For detailed analysis, we will have to
wait till NSE releases the trade-by-trade data. In the meanwhile, we can look at the
minute-by-minute data (available via Google Finance or vendors like
Global datafeed) and make some conjectures.
From the
story in the media, we know
that a trader at Emkay Securities punched wrong orders that amounted
to Rs 650 Cr sell orders hitting the market and thereby leading to flash crash.
From the minute-by-minute charts, it is clear
that all hell broke loose in the 43rd minute. Let's piece
together the minute-by-minute trading value for nifty components for
the minutes leading up to the 43rd minute.
Minute, Approximated Traded Value (Cr)
40, 15.9
41, 19.5
42, 35.7
43, 610.8
44, 39.6
... Market halted
The minute data that we have roughly matches the news
report value of 650 Cr of transactions happening in a small time window. Let's drill down into minute number 43.
We know that what emkay tried to
execute was a Nifty basket sell order i.e. all the nifty components
should be sold in proportion to their weight in Nifty. For
example, Hindustan Lever which has
3.2% weight in the Nifty should have been sold approx 19.5 Cr (610 Cr basket order * 3.2%). And this is exactly what we find in the
minute-by-minute data.
Here is a chart of expected traded
value Vs actual traded value for the 43rd minute. (Click the image for higher resolution)
The blue line indicates the line where
expected traded value is equal to actual traded value. This is the
line on which the order book presumably had sufficient depth
(obviously at atrocious impact cost – but that is the topic of next
post).
The interesting part is to look at the
outliers and speculate what could have caused them. For scrips below the blue line - such
as ITC, HDFCBANK, RELIANCE, INFY, ICICIBANK - it is very likely that
there was not enough depth in the limit buy order book at any price.
In other words, order books were burned in the 43rd
minute.
What about scrips above blue line such
as HDFC and LT which have transacted value above the ones predicted
by our model? There must have been some other big traders in the market in
the 43rd minute in these scrips apart from emkay.
Bulk
trade data corraborates this theory for HDFC. There was a bulk sale
trade by Carlyle on October 5th.
|
|
| Date |
Symbol |
Security Name |
Client Name |
Buy / Sell |
Quantity Traded |
Trade Price /
Wght. Avg.
Price |
Remarks |
| 05-Oct-2012 |
HDFC |
HDFC Ltd. |
CMP ASIA LIMITED |
SELL |
430,00,000 |
761.08 |
- |
|
|
| |
|
|
Takeaways:
1) Indian markets hardly have any depth. It is surprising and worrying to
see that a mere 15 Cr worth of sell order was sufficient to knock off
44,000 Cr of value from ITC's market cap for a few seconds. What if this happens in the last couple of minutes on F&O expiry date?
2) It is also interesting (well,
not really!) to note that some players in the market were already
aware of HDFC Carlyle trade happening and were positioned with buy orders.
