NSE Finally Responds to Freak Trades Issue from 27th September, Announcement Comes from Zerodha Founder
Moneylife Digital Team 21 September 2021
Ever since the National Stock Exchange (NSE) scrapped the TER (trade execution range) with effect from 16th August, freak trades in the derivatives segment of NSE had become a recurring routine event. Traders, who regularly suffered huge losses, have expressed outrage on social media every few days posting screenshots of the freak trades; but the exchange seemed impervious. 
There were  far too many cases of freak trades in the F&O (futures & options) segment and Moneylife has been reporting them. Moneylife Foundation has also been following up continuously with NSE to come out and explain the situation to investors through a webinar. While we were told by the Exchange on Monday night that the Exchange is working on “some changes to the option trading framework,” Nithin Kamath, founder of India’s largest brokerage firm, Zerodha, was very specific that changes would be made from 27th September – that too four days ago.  On 17th September, he tweeted “Starting Sept 27th, Stop-Loss Market (SL-M) orders won’t be available for options." (https://twitter.com/Nithin0dha/status/1438723736492859400?s=20) . Strangely, there is still no formal announcement from the Exchange. 
In the past couple of weeks, brokers have been advising their clients to use stop-loss limit orders instead of stop-loss market orders in order to limit their losses due to freak trades. Stop-loss orders are an automated way of selling particular security when it reaches a pre-set price limit, while a stop-loss market order is an instruction given to the stock exchange to sell a stock or contract at a particular price point. But, once the stock price goes below the set price level, it becomes a market order, and the sell instructions could be executed at any price at that point in time.
However, in the stop-loss limit order, the investors can specify the minimum price at which the sell order should be triggered. With this option, an investor can overcome the uncertainty attached to the stop-loss market order.
Nithin Kamath tweeted that from 27th September, the stop-loss market orders will not be available for options. NSE is stopping this facility. He said “This should help avoid freak trades and reduce its impact significantly.”
Moneylife Foundation is hosting an explainer webinar on Saturday, 25th September at 5pm. The webinar will be followed by a discussion and seeks to address confusion/ questions on the frequent freak trades and how to protect yourself. 
On 14th September, RIL futures were traded at Rs2616 while the price of the stock was Rs2,392. Similarly, trades in HDFC Bank futures were recorded at Rs1,715 compared to its stock price of Rs1,565. Similar trades were reported in Bharati Airtel, HDFC and TCS. All these five stocks are amongst the most traded stocks. 
On the same afternoon, NSE had tweeted that some unusual trades were observed during the session, which were executed by a trading member.
This is seemingly similar to what had happened on 5th July when, at the time of market opening, a trading member’s dealer placed a manual buy order for Nifty Near Month Futures in the first few seconds upon opening of the market at a price which was significantly higher than the prevailing price in the market. NSE had, at that time, sought an explanation from the broker about why it placed orders at a price much higher than prevailing price, which has misled the market.
Many traders (many of whom have turned to derivatives, especially options trading after the levy of peak margin in cash segment) have raised serious concerns with respect to the wild swing in Bank Nifty options. 
For instance, the premium of weekly Bank Nifty 36000-strike put option, expiring on 9th September, rose 2,029% from a low of Rs35.25 to touch a high of Rs750. The option finally closed at Rs53.65 against the previous close of Rs62.15. 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.
On the same afternoon, NSE had tweeted that some unusual trades were observed during the session, which were executed by a trading member. 
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.
Since NSE found it difficult to have a dynamic trade execution range that can automatically change at the Exchange level, it decided to follow other global exchanges and removed the restrictions altogether to allow demand and supply to determine the price at which a trade gets executed. But this has led to sudden rises and falls in prices triggering the stop-loss set by investors. Many market experts have pointed out that NSE 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.
One trader pointed out “If it is executed within the NSE’s so called ‘operating range’ then why is the Exchange calling it ‘unusual trade’? So that means, in a way, NSE is accepting that its operating range is unusual.”
Securities and Exchange Board of India (SEBI) had 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.
Meanwhile, in other news, NSE has shifted the settlement day from Thursday to Tuesday for its FinNifty (Nifty Financial Services Index) for both monthly and weekly derivative contracts. However, there is no change in other contracts such as Nifty futures and options, stock futures and options and on other indices and they will continue to be settled on the last Thursday of every month.
According to NSE, all weekly and monthly contracts on FinNifty will expire on Tuesday. “If Tuesday is a trading holiday, then the expiry day is the previous trading day,” the circular added. In a circular, the NSE said: “Trading in weekly index futures of FinNifty contracts shall be discontinued. 
“Accordingly, no new FinNifty weekly index futures shall be introduced from 14 October 2021 (end of the day). Weekly futures contracts of FinNifty created till 14 October 2021, shall continue to available for trading till respective expiry dates/maturity dates.”
However, weekly FinNifty options contracts will continue to be available. “Members are requested to note that there is no other change in the existing contracts specifications of FinNifty.”
Many traders have expressed their apprehension about this move. They claimed that this will create unnecessary confusion while trading and added that uniform settlement day will be easy to follow by traders.
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