Mayhem in Dalal Street after Zerodha’s systems go Kaput on expiry day
Yesterday, at 1000 hrs IST, warning bells began clanging at Dalal Street, implying that some catastrophic event was unfolding.
Punters of all shapes and sizes came rushing down from their trading terminals to the road.
“Mujhe lagta hai yeh Zerodha ka Gadbad hai,” Mukeshbhai said.
He vented his fury by forcefully spitting the Gutka in his mouth into a pothole which had been freshly dug up by the BMC.
The other punters joined him in the display of frustration and soon the pit was covered in Gutka glory.
As usual, Mukeshbhai was right.
Zerodha’s systems had once again conked off.
It issued a terse statement stating that it was “experiencing difficulties placing orders” and that the issue was being investigated.
We're experiencing difficulties placing orders with our OMS. We're investigating the issue.
— Zerodha (@zerodhaonline) August 29, 2019
However, what made the situation intolerable for its clients was the fact that Thursday is the expiry day for all F&O contracts.
The expiry day normally witnesses huge volatility and fortunes can be made or lost in a jiffy if one is on the right or wrong side of the trade.
Several traders who had taken positions found themselves trapped with no exit route in sight.
Worse, the Nifty and Bank Nifty started plunging.
Naturally, punters were distraught.
They took to twitter to vent their fury and grief.
— Bharanidharan (@Bharanidv) August 29, 2019
— THE-RANDOM-GUY (@ashish904) August 29, 2019
What d fuck with zerodha not able to cancel order and not able to place orders also! What the hell is this! @zerodhaonline i suffered loss due to this who is responsible for this now?
— Dhwanit (@imdhwanitj) August 29, 2019
#Zerodha @zerodhaonline , @Nithin0dha , I am not able to come out of the future trade (bracket order) which I entered in the morning…. I need your assistance asap…. Seriously, this is going out of control pic.twitter.com/RhhB2bnNgn
— Deepak Kumar S (@DeepakKumarS25) August 29, 2019
— Mohan (@MKCryptoAddict) August 29, 2019
— Naitik Shah (@naitik1890) August 29, 2019
Lost 10k+ because @zerodhaonline isn't working since 10am.
— Divyam Solanki (@divyamsolankii) August 29, 2019
Nithin Kamath downplays incident
Avanne Dubash, the charming reporter with ETNow, sprung into action, moved by the agony of the punters.
She summoned Nithin Kamath, the founder and CEO of Zerodha, and demanded an explanation for the fiasco.
Nithin Kamath, befitting his stature as a visionary entrepreneur, was cool as a cucumber.
He downplayed the incident and blamed “connectivity issues” for the mess.
He also made it appear that the issue was a minor one and was being blown out of proportion by punters.
— ET NOW (@ETNOWlive) August 29, 2019
Nithin Kamath’s attempt at downplaying the incident did not go down well with Anil Singhvi, the charismatic editor of Zee Business.
Anil Singhvi normally has a cheerful and playful personality. He takes things in their stride.
However, he was now enraged.
“Who will bear the LOSS?,” he demanded to know, fuming.
He petitioned the authorities to come to the rescue of the punters and save them from disaster.
Who will bear the LOSS?@zerodhaonline is frequently down. Today on the #F&O expiry day, traders are unable to execute trades@SEBI_India @NSEIndia @BSEIndia need to look into it to protect the investors interest
Zerodha must clarify immediately n save investors@ZeeBusiness
— Anil Singhvi Zee Business (@AnilSinghvi_) August 29, 2019
Anil Singhvi’s comments met with rousing support from his massive base of 1 lakh followers.
Leslie had earlier dragged Zerodha to Court and got compensation
It may be recalled that earlier a tenacious punter named Leslie Prabakar Ruphas had filed a suit against Zerodha and demanded compensation for losses caused due to “network failure” at Zerodha’s end.
Zerodha tried to wriggle out of liability by citing legalese but it was outmaneuvered and pinned down by Leslie and the arbitrators.
“The respondent (i.e. Zerodha) was not able to prove that the system failure was not due to their control. It is verified with the NSE that no system failure was caused in their trading platform on 26.10.2017. Hence, the system failure was due to the negligence on the part of the respondent only for which they have to take the responsibility of compensating the loss sustained by their client due to the system failure of the respondent,” the distinguished arbitration panel held.
“Zerodha has totally acted against the interest of the applicant by not maintaining then system properly between 9.30 AM and 10 AM on 26.10.2017 and by squaring off his position till the loss is reached by 100%,” the panel ruled, sealing Zerodha’s fate.
Of course, Zerodha has probably now taken care to exempt itself from liability for losses to clients due to “network failure” and similar causes.
Conspiracy theories against Zerodha abound
It is well known that Zerodha has a proprietary desk in which it places its own trades.
According to some traders, this could lead to a situation of potential “conflict of interest“.
In fact, one trader had raised the issue in a point-blank manner.
“Is zerodha counter trading there by zerodha earning big money at the cost of retail investors ?
Is loss of retail investors is gain to zerodha?
Are practices like counter trading allowed by SEBI ? Does SEBI has any guidelines to monitor?
Do retail investors have to start a campaign against this?”
This was repeated by another trader on a later occasion.
“It appears that Zerodha is having a prop positions. If so, then, it is very much possible that you could be using client’s money to take positions. Also, it seems very much possible that zerodha trades (as well as brokers), it could take counter positions easily due to the Order information available in zerodha server.”
Nithin Kamath vehemently rubbished the allegations.
“People promote conspiracy theories to generally find a reason to blame for own losses.
I have explained this before, can’t find the link. Firstly unlike other exchanges, all orders are first placed on the exchange.
There aren’t dark pools etc in India unlike the US. Once order is on the exchange, anyone can fill it. There are high frequency trading companies who fill orders within micro seconds from when orders are placed on the exchange. We do no high frequency trades.
If a broker is counter to any client trade, it creates an alert on the exchange. We have to explain why this has happened.
We have an inspection every few months where everything is audited. Every aspect of the business.
Just to clarify, counter trading isnt’ really possible technically on our exchanges even if someone wanted to. Every order has to be placed on the exchange first like I said. You get an exchange order number as soon as it is placed,” he explained in a laborious manner.
However, traders are still not convinced by the explanation.
After yesterday’s fiasco, they are again raising conspiracy theories.
Mind you, ZERODHA also has a prop desk …
— MoM (@ryuvaraj26) August 29, 2019
— jay (@niftywizard) February 27, 2019
@nithinkamath Hey, you need to shut down that Zerodha prop desk…seems like your team is gaming Indian retail clients during volatility days…
— r.manish (@Delta_seeker) February 27, 2019
This piece is not aimed at any particular broker, but just a general observations on the technicalities here.
Let us say a broker ABC has a lot of individual clients, numbering in lacs. It also has a large prop wing.
Prop : Proprietary trading by the firm using own money
— Subhadip Nandy (@SubhadipNandy) August 30, 2019
So one xpiry days when lacs of clients try to punch in orders, the system is overwhelmed. However, it would be interesting to find out if the broker's prop orders go thru at that time. That is , IF THE PIPELINE REMAINS OPEN FOR THE PROP SIDE FOR FAST EXECUTION…
— Subhadip Nandy (@SubhadipNandy) August 30, 2019
Penny stock is the culprit – post mortem report of Zerodha
Zerodha has now issued a post mortem report in which it has identified the root causes of yesterday’s system failure.
It appears that the culprit is a penny stock.
Apparently, some rogue trader punched in an order to buy or sell 10 lakh quantity of a penny stock.
This single order overwhelmed Zerodha’s system and brought it to its knees.
“The root cause of the issue today was a freak incident that neither we, nor our OMS vendor Thomson Reuters (now Refinitiv), have encountered before. It is normal for a large single order to get executed in multiple trades at the exchanges, usually up to several hundred trades. But today, a single order for 10 lakh quantity placed at around 9.40 AM on a sub Rs 1 stock (penny stock) on BSE got executed in almost 1+ lakh individual trades. This is unprecedented and caused an overload in the OMS,” it was explained.
Zerodha also clarified that it has taken remedial steps and limited the maximum allowed quantity per order for equity trades to 20,000.
If a client has to enter or exit larger quantities, it would have to be done in multiple orders of 20,000 quantity.
It will also launch basket orders on Kite to ensure it is not inconvenient to create multiple orders of 20,000 for a particular stock.
Zerodha also stated that there is no link between the low brokerage costs and the technological fiascos.
“I want to reassure you that technology and quality of our products are something that we never compromise on. Our low brokerage has no bearing on the quality of our technology, which every day, scales to serve millions of our clients place millions of trades,” Nithin Kamath stated in a soothing tone, bringing some cheer to his beleaguered clients.