The stock market crash on Tuesday, with markets hitting the lower circuit on ridiculously low volumes, has exposed the creaking infrastructure.

Market participants blame systemic failure for the bloodbath in Indian markets.

According to stock brokers, the real pain in markets started with the over-zealousness on the part of stock exchanges in collecting margin money after the 700 points fall on January 18 and another 14,00 points fall on January 21.

The trading terminals of nearly 90 per cent stock brokers were shut on Tuesday when the markets hit the lower circuit of 10 per cent within a few minutes of opening bell, as the National Stock Exchange doubled the margin money overnight.

"The exchanges wanted stock brokers to pay additional margin money immediately. How can we do this  when our clients' cheques take at least two days to clear?" asked a Bombay-based broker who deposited an overdue margin of about Rs 1,000 crore (Rs 10 billion) with the exchanges on Wednesday.

A payment crisis was already looming in the aftermath of the Reliance [Get Quote] Power IPO.

The call for more margin money, from stock exchanges, had a domino effect on the markets.

The money was debited from many broker accounts at around 4 pm on the transaction day itself instead of 11 am on the next day. Stock brokers who had lent money to investors to buy shares, were compelled to demand repayment.

Under the margin funding system, retail investors typically pay for 10 to 20 per cent of their purchases and brokers contribute the remaining amount.

When the market slumps, the 10 per cent investment is wiped out. The financiers demand another cash deposit, known as a margin call, or sell their clients' remaining holdings to recoup losses.

"Stock brokers had to square-off huge positions and also sell leveraged client positions to make immediate payments to the exchanges, which caused a panic and stress on the entire system," said Angel Broking managing director Dinesh Thakkar.

A whopping Rs 3,97,750 crore (Rs 3,977.5 billion) in market value was wiped off on Tuesday as stock prices fell in the range of 20 to 30 per cent. The total market cap lost from the peak now stands at nearly Rs 18 lakh crore (Rs 18 trillion).

"Nowhere in the world have we seen the stock prices hitting the circuit filter and trade being halted four times in the last four years," argued C D Equisearch Stock Broking director Jayesh Vohra.

Vohra further said that despite finance minister P Chidambaram asking banks to lend money to stock brokers in order to overcome the payment crisis, we were unable to borrow enough money as some of them were charging exorbitantly high interest rates of up to 24 per cent.

The crux of the matter, according to Deven Choksey, managing director K R Choksey, lies in the fact that akin to other european countries we should have a real time settlement system to ensure easier fund transfer.

"Also, the regulator or exchanges should ensure that, exposure given to clients by the stock brokers should be limited to the margin money deposited with the exchanges. This could then limit the margin call pressure and not force exchanges to sell investor shares when the markets falls," he said.

Both Choksey and Thakkar are of the view that if a delivery-based derivative system was introduced in place of cash-based settlements, similar to US markets, it would ensure that investors do not build leveraged positions.

• The stock market crash: Complete Coverage