Freak trade at NSE, yet again

Suresh P Iyengar Mumbai | Updated on September 08, 2021

The National Stock Exchange witnessed yet another freak trade in the futures and options section on Tuesday. The wild swing in Bank Nifty options has raised serious concerns among investors who have turned to derivatives, especially options trading after the levy of peak margin in cash segment.

The premium of weekly Bank Nifty 36000-strike put option, expiring on September 9, rose 2,029 per cent from a low of ₹35.25 to touch a high of ₹750. The option finally closed at ₹53.65 against the previous close of ₹62.15. The underlying Bank Nifty index opened at 36,559 points and hit a high of 36,686 and low of 36,152 before closing at 36,469 with a loss of 124 points.

Freak trades in the derivatives segment of the NSE has become a recurring event ever since the exchange scrapped the TER (trade execution range) in mid-August.

However, the execution range led to trade disturbances, particularly during the market opening. During the huge swings at market opening, the reference price and range calculated based on previous closing price, historical implied volatility and other parameters bear little relation to the actual price.

This is an issue, even during trading hours when there is a sudden rise or fall in prices.

Whenever the actual price is outside the trade execution range, no trade can be executed until the exchange increases the execution range manually.

Finding it difficult to have a dynamic trade execution range that can automatically change at the exchange level, the NSE decided to follow other global exchanges and removed the restrictions to allow demand and supply to determine the price at which a trade gets executed.

However, this led to sudden rises and falls in prices triggering the stop loss set by investors.

The TER factor

Anand James, Chief strategist, Geojit Securities, said that though a direct inference cannot be made, freak trades have been rising after the removal of TER in the F&O section. The exchange can work out a higher price range rather than removing it altogether to ensure investors' confidence, particularly when new investors are entering the options segment.

SEBI recently shortlisted TCS, Wipro, Capgemini Technology Services, L&T Infotech and NEC Corporation India for implementing a data analytics-based software to detect fraud and alert the regulator to take corrective measures and levy penalty.

Published on September 07, 2021

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