Scope of 'freak trade' limits on derivatives may get wider

The exchange will watch new norms effective from next month

The National Stock Exchange (NSE) might extend a limit on entering order prices which are outside the normal trading range of securities.

The exchange had earlier announced orders for certain derivative contracts would be executed only if these were within a certain ‘price band’. These new norms were to be applicable to mid- and far-month futures and options contracts. These might now be extended to other products as well, said Chitra Ramkrishna,managing director and chief executive officer of NSE.  “If it works out, we will implement it across the board,” she said, on the sidelines of a technology summit organised by NSE.

 

The earlier NSE circular looked at imposing such a limit on derivative contracts but had kept India VIX futures and long-term option contracts on the Nifty out of it. “Any incoming order, if it results in execution of a trade outside the reference price and execution range (full or partial as the case may be) shall be automatically cancelled by the exchange,” said the circular dated April 11.

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• Orders executed only if price within a reference range
• Applicable for mid-month and far-month F&O contracts from May 5
• Might be extended beyond this if limits experiment successful
• VIX futures and long-term Nifty options had been kept out earlier
• Move would help prevent freak trades, fat-finger errors: Experts

The reference price for futures was five per cent, it said. It went up to 20 per cent for the options segment. The circular was to come into effect from May 5.

Vinay Agrawal, executive director, Angel Broking, said the move would be a positive step towards avoiding dealing-room errors. “It is a good move. Fat-finger trades will be curbed if this is put in place,” he said.

A fat-finger trade refers to a dealer pressing the wrong key while putting through an order, resulting in an incorrect trade. Emkay Global Financial Services suffered a loss of around Rs 50 crore in October 2012 when a dealer mistakenly sold Rs 650 crore worth of securities instead of punching in an order for Rs 17 lakh.

Naresh Tejwani, president of the Association of National Exchanges Members of India, a body for stock brokers, also welcomed the move. “Very often, people put orders at far below the intrinsic price of a security…there have been a lot of freak trades…this is a good move to protect market integrity,” he said.

When asked about talk of consolidation in the exchange space, Ramkrishna said she was unaware of any moves towards fewer exchanges but suggested this might not be a positive development. “More is better…competition is always a good thing,” she said.