Indian markets were rattled today by technical glitches at the National Stock Exchange (NSE) in both its cash and derivative segments. Though the exchange gave regular updates on when trading would start, rumour mills were working overtime on the cause of the delay.

Some attributed it to hacking of NSE servers which protected trading while others raised the issue of a recent SEBI notification which banned foreign portfolio investors (FPIs) from issuing participatory notes (P-Notes) whose underlying assets are equity derivatives, and ordered unwinding of existing contracts. The new norms say P-Notes are allowed only for hedging. With this SEBI has virtually shut the doors on P-Notes in India. The move was expected to put severe pressure on the stock market as equity derivative positions of over Rs 40,000 crore are held via P-Notes, most of which were expected to be unwound.

While the real reason for the stoppage has not been given, the exchange has attributed it to technical glitches and the Finance Ministry has sought a report from market regulator SEBI on the issue. Reports quoting Finance Ministry sources say that there was no information on hacking. The ministry is expecting an interim report from SEBI by end of the day.

However, the entire episode has once again exposed the weakness in the largest stock exchange – i.e., of its inability to be damage control or come out clean.

Rarely has one heard of any NSE’s official statement in the co-location controversy. A Bloomberg report points out that NSE gets almost one-third of its revenue from co-location facility. It also quotes a forensic study by Deloitte Touche Tohmatsu which points out the awful gaps in systems, processes and ethical behaviour.

A question that is worth asking is why are most of the problems taking place on the NSE? Even in the early days of the NSE, the exchange used to occasionally shut down for a few hours in certain months on account of what used to be called ‘Sun-outage’.

Though government appointed officials have been managing the show in NSE since its beginning, their high handedness is likely to get in its way, going forward. Thankfully, NSE is not a listed entity, else it would have given a great opportunity to short its shares. As sweet revenge goes, the shorting of NSE shares would have been possible in its rival exchange – the BSE. NSE cannot afford the same attitude of damage control after it gets listed.

Luckily, for NSE, today was not an important day in the market. Had it been a Budget day or the last day of expiry for the derivative segment, the exchange would have cut a very sorry face.

The delay in its public offering is an opportunity for the exchange to get its act in place if it wants to be truly called among the best exchanges in the world. For the government, too, it is important to have a closer look at the operations of the exchange, as the stock exchange is the face of the government to global investors.