Is NSE moving to halt freak trades?

Suresh P Iyengar Mumbai | Updated on September 18, 2021

Bourse said to be mulling removing ‘stop loss-market’ in options trading

Rattled by frequent freak trades, the National Stock Exchange plans to remove the “stop-loss -market” (SL-M) from options trading. The SL-M facility enables traders to opt for the best price in the market rather than putting a price of their own.

Once a trader punches in his price for a put or call option, any freak trade will not trigger the stop-loss automatically, leading to an unexpected huge loss for the trader.

Nithin Kamath, Founder and Chief Executive Officer, Zerodha, tweeted that starting Sept 27, Stop Loss-Market (SL-M) orders won’t be available for options. @NSEIndia is stopping the facility. This should help avoid freak trades and reduce its impact significantly, he said.

NSE did not respond to BusinessLine‘s queries in this regard.

There have been a number of freak trades on the NSE over the last few months.

After gaining confidence with intermittent freak trades with options trading in a few large- and mid-cap stocks, the scrupulous elements had a field day early this week in the futures segment as well.

Stop-loss trigger

On Tuesday, stop-loss was triggered in Reliance Industries, TCS, HDFC Bank, HDFC, and Bharti Airtel. Reliance September futures opened with a gain of 10 per cent at ₹2,616 against the previous close of ₹2,378. On the other hand, in the spot market, RIL’s high was ₹2,394 on Tuesday.

Similarly, Bharti Airtel futures jumped 10 per cent to ₹762.15 while TCS futures opened at ₹4,230. However, underlying stocks and Nifty traded normally without any unusual movement.

Since the options market lacks depth, most traders prefer the SLM mechanism but their habit needs to change given the frequent freak trades, said a trader.

Anand James, Chief Market Strategist, Geojit Financial Services, said that when a normal market order is entered traders are making an informed decision and are in front of the trading screen watching the prices. In the case of stop-loss orders, traders are mostly away from the screen and are unaware of the volatility in play, he added.

“In such cases, market orders increase the chances of freak trades. This is especially so in options, where exaggerated prices are quite possible due to the nature of the product,” he said.

Frequent freak trades in the derivatives and inaction by the exchange — first level regulators — has shaken investors confidence particularly when retail investors are flocking to the market in large numbers, said an investor.

Published on September 17, 2021

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