Stock markets are rising but brokers will have to limit their order size. To avert a flash crash-like situation, both the Bombay Stock Exchange (NSE) and the National Stock Exchange (NSE) have implemented a maximum limit of Rs 10 crore per order for members across the board from today. Brokers are divided on the impact such a trade restriction could have on day-to-day market activity.
Effectively, for trades done in the derivative or cash segments by institutional or high net worth individuals, brokers will have to limit their order size to Rs 10 crore. This is also applicable to algorithmic trading and large block deals.
The new rules were formed after the recent flash crash that saw the benchmark S&P CNX Nifty index of the NSE crash 16 per cent in two minutes, due to a freak trade in the cash segment. In October last year, a trader with Mumbai-based Emkay Global Financial Services, punched an erroneous order to sell Nifty index basket worth Rs 650 crore. Originally, the order was from Templeton MF to sell shares in Nifty basket worth only Rs 35 lakh and was to be executed in two tranches of Rs 17 lakh and Rs 18 lakh.
A section of brokers say, market impact cost could rise for traders who want to execute large orders. Market impact cost is like a transaction cost for a trader based on liquidity conditions. It is calculated on the basis of how much a trader needs to pay over the initial price due to market slippage or rise, i.e. cost incurred as the transaction itself changed the price of the asset.
The counter view to this argument is that it would cause inconvenience only to block deals and per-negotiated private executed deals on the exchange platform. Experts say, international practice among institutional players is to get large orders executed in small sizes, which look like retail trades. Trades are done through a preset computer programme and volume-weighted average price (VWAP) methodology is followed. VWAP is the ratio of the value traded to total volume traded over a particular period (mostly intra-day). VWAP ensures the trader executes the order in-line with volumes in the market to reduce transaction costs by minimising the market impact costs.
“Terminal operators are under pressure when large institutional orders or basket trades are to be implemented during high volatility. They have to do it in such a way that the price of the security does not change much. So, new rules may definitely increase the impact cost and volatility may go up,” said the managing director of a broking firm that is counted among India’s oldest.
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According to Vikas Khemani, executive vice president at Edelweiss Securities, it could be too early to comment on this. "Initially, it seems there won't be any issue with the new rules and even impact cost would not go up. Brokers usually break down large orders into small trades based on market depth," said Khemani.
Another expert said, per-defining order limit for a trading terminal and managing these limits per minute or per second could have been a better option as even small erroneous orders going through high frequency trading can cause chaos. Clearly, order limit of Rs 10 crore may make it tedious for the trading desk, where large basket orders are to be implemented, as noticed in the case of Emkay.
Both NSE and BSE combined have more than three lakh trading terminals.
Though exchanges require brokers to define their orders, most trading houses had put their terminals on ‘no limit’ mode, as a matter of convenience for quick execution of large institutional orders.