The Securities and Exchange Board of India (SEBI) has said that effective April 1, 2025, the National Stock Exchange and the BSE would act as alternative trading venues for each other in case one of them faces any outage during trading hours. Vivek Kumar M takes a look at what it means for investors
Why SEBI wants stock exchange interoperability?
The main objective of this decision by the markets regulator is to ensure business continuity even if one of the exchanges faces any hiccups in executing trades. SEBI highlighted that in case of outage at an exchange during trading hours, the market participants with open positions will be exposed to price risk as there could be material news flow during that time.
The framework, which will come into effect from April 1 next year, aims to enhance investor protection and maintain market stability in case of unforeseen disruptions. This interoperability will cover cash, equity derivatives, currency derivatives and interest rate derivatives. Once this framework comes into effect, an individual trader or investor who has an open position (any investment or exposure held by an investor in his portfolio as in a stock bought but yet to be sold) on one exchange can close it through another exchange if the former faces a technical glitch. In the past, there have been instances where outage at an exchange has caused losses to traders and investors.
What happened during the last outage?
On February 24, 2021, just a day before the expiry on monthly derivatives contracts, the NSE experienced a glitch on its platform in the early hours of trading. The exchange decided to halt trading at 11:40 AM. The issue could not be resolved during regular market hours, propelling it to extend trading hours till 5 PM. Other exchanges— the BSE and the Metropolitan Stock Exchange of India — also had to extend trading.
As per reports, this was the tenth instance of trading glitch at the NSE in just four years.
The NSE had multiple telecom links with two service providers at that time, and both of them informed the exchange that there were issues with their links on February 24, 2021, which led to the disruption.
What was the impact of that outage?
While there is no official estimate on the losses incurred due to the 4-hour pause in trading, since it took place just a day ahead of the expiry of monthly futures and options contracts, it would be quite a big amount. The situation was further exacerbated by delay in communication from the NSE to brokers and traders.
Zerodha shared in a blog that it had no op tion but to exit the intraday positions of all its clients at around 2:30 PM as there was no update on when and even whether the trading would resume. “This was important (and in the clients’ best interest) because these positions could have led to leveraged positions, short delivery and huge auction penalties if held overnight,” Zerodha said.
The regulator conducted an investigation into the incident, which concluded with the NSE and four other applicants settling the matter by paying Rs 72.65 crore.
How will the interoperability system work?
In case of any outage at either of the two stock exchanges, SEBI has said that the affected exchange has to inform the alternative trading venue as well as SEBI within 75 minutes about the invocation of the instant business continuity mechanism.
Further, the alternative trading venue has to invoke the business continuity plan as per the set standard operating procedures (SOP) within 15 minutes of such intimation.
The regulator has directed NSE and BSE to submit a joint SOP within 60 days. The SOP will contain a plan to be invoked at the time of outage on one exchange along with flow of activity involving the affected exchange and its alternative trading venue and roles/responsibility of each of them.
What happens to stocks listed exclusively on one exchange?
The interoperability system will work for stocks that trade on both exchanges or indices for which there are correlated products on the other exchange. However, in case of stocks exclusively listed on one exchange, this framework cannot be applied in the current format.
SEBI has said that exchanges may create reserve contracts for scrips and single stock derivatives not traded on their platform, but are available on the other exchange.
In case of index derivatives products not having correlated products on another exchange, the markets regulator has recommended that the two exchanges may consider creating such an index and introducing derivatives contracts on it in line with extant regulatory provisions.