MCX glitch leaves silver traders stranded, may face stiff fine
A technical glitch halted trading on MCX just as silver options were set to expire, stranding traders with open positions and exposing them to volatile price moves. Even after trading commenced at 1:25 pm, some brokers experienced difficulty in executing orders for clients.
MUMBAI: Tuesday’s technical glitch affecting the country’s largest commodity derivatives bourse, the Multi Commodity Exchange of India (MCX), coincided with the expiry of silver monthly options contracts, sending traders with open positions on the contracts into a tizzy.
It also opened up the possibility of a hefty penalty of ₹25 crore on the exchange, according to Securities and Exchange Board of India (Sebi) circulars that provide for a 45-minute window to restart operations after a “disaster" is announced, with some relaxation possible in the event of a cyber attack.
A disaster has to be declared within 30 minutes of the incident and the exchange has to restore trading within 45 minutes of the declaration of a disaster. Trading resumed on Tuesday at 1:25 pm, more than four hours behind the scheduled opening of 9 am.
An exchange must submit a preliminary root-cause analysis within 24 hours of a glitch and a comprehensive report within 21 days.
Even after resumption of trading, certain traders reported difficulty in executing orders. “Trading has commenced but we are facing some difficulty, with some orders not going through," said a broking official, requesting anonymity as he was not authorised to speak on the subject. This, however, was resolved later.
The matter was compounded as it coincided with the expiry of silver options contracts — any client who sold or bought a call or put option and wanted to close their outstanding positions could not do so because of the halt in trading. This exposed them to a price risk if they choose to cut their losses or book profits.
MCX trading commences at 9 am and runs through 11:30 pm IST, with the second session from around 5 pm, coinciding with the opening of overseas bourses like Comex in silver and gold and Nymex for crude.
Since MCX offers silver options that could devolve into futures upon expiry, clients have a choice to either square off their positions before expiry at 11:30 pm or allow the option to devolve into a futures position.
“The matter is all the more vexing as silver, like gold, corrected from its highs around Diwali," said the broker quoted earlier.
Silver of 99.9% purity opened down 3.12% at ₹1.43 lakh a kg on the spot market in morning trade, per the India Bullion and Jewellers Association (IBJA), whose precious metals rates are used by the Reserve Bank of India to redeem sovereign gold bonds.
On the commodity exchange, silver call options of the ₹1.5 lakh strike price closed with open positions of over 2 tonnes on Monday, per MCX data. As the exchange gives only single-sided outstanding or open positions—a measure of money flowing into a market—sellers would have had open positions of 2 tonnes.
Similarly, on silver put of strike price ₹1.4 lakh, the open position was 1.39 tonnes.
Either buyer or seller would be left in suspense until the trading begins on the expiry day for silver options.
“There was more work in silver because of the shortage earlier this month, which took prices to a life high of ₹1.78 lakh," said the broker quoted earlier.
Prices have since tumbled almost 20% to ₹1.43 lakh, per IBJA data.
According to Uttam Bagri, managing director of BCB Brokerage Pvt. Ltd, this could compel traders to seek alternative contracts available on other exchanges like the National Stock Exchange of India Ltd or BSE Ltd, which also offer commodity derivatives segment in addition to equities trading.
“If any exchange does not deliver quality services to its trading members/clients, then market forces will make the business shift to competing exchanges," said Bagri.
Penalty possible on MCX
A Sebi circular on “SOP for handling of technical glitches by MIIs…" stipulates a penalty of 10% of the average of standalone net profit for previous two fiscal years or ₹2 crore, whichever is higher.
The average of FY24 and FY25 stand-alone net profit is ₹248.95 crore and 10% of this works out almost ₹25 crore.
However, two former whole time members said that there could be some relaxation in the event of a cyber attack, which could not be ascertained from the MCX spokesperson till the time of writing.
A media statement by the exchange said, “An investigation into the issue has been initiated on priority. We are committed to identifying the cause and implementing necessary corrective measures."
A relaxation to the SOP on 20 September last year states that “SEBI shall provide an opportunity to the concerned MII to make its submission in respect of glitch which shall be considered by SEBI before imposing any financial disincentive as per the instant framework."
Recurring outages
MCX’s backup services, or its disaster recovery site, also did not get activated when the exchange’s systems failed to start. Tata Consultancy Services Ltd replaced 63 Moons Technologies Ltd as MCX’s software vendor in October 2023.
This is not the first time MCX has faced a disruption. Similar outages were reported in July and in February last year. Such recurring outages may indicate a lapse in following the Securities and Exchange Board of India’s technology and compliance rules, market experts said.
“Sebi has well-drafted guidelines and obligations for all exchanges and clearing corporations. If these guidelines were properly followed, there would be no glitches. It appears that Sebi’s norms are being bypassed," said Vijay Sardana, Supreme Court advocate and a techno-legal expert.
“The MCX board may not have critically reviewed compliance, and the exchange management may lack the technical competence to evaluate what its vendor is providing to the exchange," Sardana added. “Frequent breakdowns point to systemic management and corporate governance failures. Sebi must initiate a forensic audit to assess the readiness of the disaster recovery systems and make the findings public."
Bagri of BCB Brokerage explained that exchanges are highly complex systems with multiple interconnected software and hardware components, and any malfunction of any component can have unexpected consequences and possible disruption.
When failures occur, trading is usually shifted to the backup system—designed to be nearly as powerful as the main platform—until the issue is resolved, Bagri added.
MCX had earlier on Tuesday said trading would commence at 10.30 am. But eventually, normal trading resumed only at 1:25 pm. In a statement later, MCX said an “investigation into the issue has been initiated on priority" and that “corrective measures" would be implemented.
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