SEBI sets new rules to prevent flash crashes

People walk outside the Mumbai Stock Exchange building February 10, 2011.

MUMBAI (Reuters) - Market regulator Securities and Exchange Board of India (SEBI) unveiled a new set of measures, including reducing the trading band for a wide category of stocks and capping single orders at nearly $2 million, to prevent future flash crashes.

The measures unveiled late on Thursday come after an erroneous trade order of more than $125 million from a broker at Emkay Global Financial Services sent shares sharply lower in October.

Analysts said the measures were unlikely to have a wide impact on stock volumes, although markets may react at the open.

"There may be knee jerk reaction to this move for the market, but it would not matter a lot," said Anup Chandak, senior manager of the advisory division at Sharekhan.

"Brokers and HNIs might be worried as exits would get difficult in a bad market," he added, referring to high net worth individuals.

Under SEBI's new guidelines, stock exchanges will not be able to accept single orders for stocks, equity derivatives or exchange traded funds of more than 100 million rupees.

In addition, the regulator narrowed the trading band for stocks that also trade on derivatives markets to 10 percent from 20 percent, although exchanges will be able to adjust the band in increments of 5 percent depending on market conditions.

SEBI also directed brokerages to set internal limits on the cumulative value of unexecuted orders, while directing them to reduce risk when 90 percent of the collateral for margin trading is utilised.

(Reporting by Abhishek Vishnoi and Rafael Nam; Editing by Gopakumar Warrier)