Explained | What are freak trades and how you can protect your investment against them

#Explainer, #Market

Recently, the futures and options (F&O) segment of the Indian markets has seen a rising number of what has been defined as “freak trades”, wherein participants have reported trades being executed far away from the current market price in F&O contracts.

“On Tuesday, as per information provided by Stock exchange, futures contracts of TCS, Bharti Airtel, HDFC twins – HDFC & HDFC bank – recorded an exponential jump of around 10 percent each for a few nanoseconds in early trading hours,” said Aprajita Saxena, Research analyst, Trustline securities.

On Tuesday, the future contract prices of HDFC reached a level of Rs 3,135 even as the spot price was hovering around Rs 2,850 apiece.

“Such freak trades are possibly occurring on account of low liquidity caused by new stringent margin norms of SEBI that have increased the capital requirement for traders/speculators. Thus, drying up most of the liquidity from the futures market ecosystem,” she added.

Another reason could be, since august 16, 2021, the National Stock Exchange of India (NSE) has completely discarded execution ranges, price bands within which contracts can trade.

Prior to this, the NSE used Trade Execution Range (TER) mechanism as a risk management measure which ensured that market orders didn’t execute beyond a defined execution range.

“This system was avoided because when prices of underlying securities swing dramatically, it created a barrier to price discovery,” said Ashis Biswas, Head of Technical Research at CapitalVia Global Research.

This change of stance puts the exchange in line with practices that are followed by other exchanges around the world, which is not to have such restrictions and allow demand and supply at any given time to determine at what price a trade gets executed.

“Their (NSE) stance seems to be that traders have to be careful about this while placing orders on the exchange and that contracts being completely banned from trading for a few minutes is a lot worse than a few freak trades,” noted Nithin Kamath, the founder and CEO of Zerodha, in a recent blog post.

According to him, these freak trades can be avoided by placing a limit order.

A limit order is a type of order to purchase or sell a security at a specified price or better. For buy limit orders, the order will be executed only at the limit price or a lower one, while for sell limit orders, the order will be executed only at the limit price or a higher one. This stipulation allows traders to better control the prices they trade.

“Assume that an Index call option contract is trading at Rs 100, and you decide to buy five lots at market price. Instead of placing a market order, you can place a limit buy order at Rs 102. This will ensure that your order is treated as a market order and that the impact cost does not exceed 2 points, if at all,” Kamath explained.

“Similarly, if you want to sell at the market price of Rs 100, place a limit selling order at say Rs 98 to ensure impact cost is not more than 2 points on the trade.”

Another risk arising from these freak trades is the stop-loss getting triggered.

“If you had bought an Index call option at Rs 80 and stop-loss at Rs 70, a freak trade at Rs 50 would trigger your stop-loss order.”

How do you avoid it? Use stop-loss limit orders and not stop-loss market orders, says Kamath.

Unlike the regular stop-loss orders, a stop-loss limit order allows traders to specify a limit on the price at which they will execute. There are then two prices specified in a stop-limit order: the stop price, which will convert the order to a sell order, and the limit price. Instead of the order becoming a market order to sell, the sell order becomes a limit order that will only execute at the limit price (or better).

Saxena also recommends using the stop-loss limit system apart from setting up alert tools/notifications in the trading terminal to avoid such freak trades.

Internet Explorer Channel Network
News Related

OTHER NEWS

UDAN scheme: Aviation Ministry likely to seek four-fold increase in FY23 budgetary outlay

Representative Image With domestic air traffic picking up and the Indian aviation industry showing signs of a recovery from the impact of the Covid pandemic, the Ministry of Civil Aviation ... Read more »

Nidan diagnostics enters IPO race with promising performance

The pandemic’s second wave hit the country, and infected people flocked to diagnostic labs to get a Covid test. This aided many Diagnostics companies financially. Since then, Covid cases have ... Read more »

Speculation over Amarinder Singh's next move, may launch party on October 27

Punjab Chief Minister Amarinder Singh (Illustration: Moneycontrol) Former Punjab chief minister Amarinder Singh may launch his new political party here on Wednesday, according to speculation triggered by the announcement of ... Read more »

Novartis may spin off generic unit Sandoz to maximise value

(Image: Reuters) Novartis has raised the prospect of divesting its generic drugs unit Sandoz after years of revamping the business, saying on Tuesday it would pursue whatever option would deliver ... Read more »

Snapdeal announces two key appointments ahead of its Rs 3,000 crore IPO

Representative image. India’s e-commerce site Snapdeal has strengthened its board with key appointments ahead of its Rs 3,000 crore IPO. These include Kaushik Dutta, the Chairman of Zomato, and who ... Read more »

IndiGo launches direct flights between Shillong and Dibrugarh

Representative image. To strengthen regional connectivity, private airliner IndiGo on October 26 announced the launch of direct flights between Shillong in Meghalaya and Dibrugarh in Assam under the Regional Connectivity ... Read more »

Job creation slows in August, shows government payroll data

Representative Image (Source: ShutterStock) Formal job creation in the country slowed in August, payroll data from the Ministry of Statistics and Programme Implementation (MOSPI) showed. Fresh subscribers to the government’s ... Read more »

GIC & Spanish infra firm Cintra likely to acquire significant minority stake in IRB Infra

Representative image Singapore’s sovereign wealth fund GIC and Cintra, an arm of Spanish infrastructure heavyweight Ferrovial are poised to pick up a substantial minority stake in highway construction firm IRB ... Read more »

Great social pressure preceded the fossil stop ABP

Photo: ANP Prior to the decision to stop investing in fossil fuel producers, Pensioenfonds ABP received “a lot of letters and phone calls” from pension participants and staff. That is ... Read more »

Hema also wants to sell fresh Jumbo sandwiches

Hema announced this during the presentation of its new strategy. The chain recently announced that the collaboration will end with web shop Wehkamp, ​​among others. They also distanced themselves from ... Read more »

Natural gas futures higher for 2nd straight day on firm demand; moving averages stay positive

Natural gas futures surged for second successive day on October 26 as participants increased their long positions as seen by the open interest. The gas price had soared 2.93 percent ... Read more »

Zee Entertainment shares up 7% as Bombay HC grants injunction

Zee Entertainment share price rose 7 percent intraday on October 26 as the Bombay High Court granted injunction against calling extra ordinary general meeting (EGM) today in the Zee Entertainment-Invesco row. Meanwhile, the company ... Read more »

Realty sector high on revival route, housing sales rise 57% in Tier-I cities

While Navi Mumbai ranks high on several quality-of-life parameters, today it is a pale shadow of what it was intended to be. (Image via Wikimedia Commons 4.0) Housing sales across ... Read more »

Budget 2021: There are still more questions than answers over the end of public sector pay freeze

According to the Institute for Fiscal Studies, pay levels for teachers are currently 8 per cent lower in real terms than in 2007, while the average real terms pay of NHS dentists has fallen by more than a third over that period. Read more »

Zee Entertainment shares up 7%; board cancels October 27 board meeting

Zee Entertainment share price rose 7 percent intraday on October 26 as the Bombay High Court granted injunction against calling extra ordinary general meeting (EGM) today in the Zee Entertainment-Invesco row. Meanwhile, the company ... Read more »

Neutral Orient Electric; target of Rs 500: Motilal Oswal

Motilal Oswal’s research report on Orient Electric Revenue grew 37% YoY and came in 19% above our estimate. While the surge in commodity prices led to a 480bp YoY deterioration ... Read more »

Heathrow: full aviation recovery may not be until 2026

Photo: ANP London’s Heathrow Airport believes air traffic may not fully recover from the coronavirus until 2026. However, the busiest airport in the United Kingdom is seeing signs of an ... Read more »

China targets online retail sales of $2.66 trillon by 2025

Let’s have a look at corporates who are going back to work at the office in the post-COVID era [Representative image] China’s commerce ministry said on Tuesday that it aims ... Read more »

Oil at $88-90 a barrel in 2-3 months can't be ruled out given the ground realities

Joseph Thomas, Head of Research, Emkay Wealth Management With Brent at $86 a barrel, oil is at multi-year highs. The price of oil and gas has gone up as consumption remains robust ... Read more »

Bombay HC grants injunction to Zee Entertainment, bars Invesco from holding EGM

ZEEL | Representative image The Bombay High Court granted injunction against calling extra ordinary general meeting (EGM) today in the Zee Entertainment-Invesco row. On October 22, the court reserved its ... Read more »

Neutral Colgate; target of Rs 1690: Motilal Oswal

Motilal Oswal’s research report on Colgate CLGT’s 2QFY22 result was in line with our estimates. Two-year average sales growth, at 5.2% in 2QFY22, continues to remain in the 4-6% range ... Read more »

Amazon Prime Music rolls out support for Hindi on Android

Representative image (Source: https://unsplash.com/) Amazon’s music streaming service Prime Music has introduced Hindi language interface on its app. The service says that Hindi is the most streamed language on Amazon ... Read more »

Bharti Airtel, Vodafone Idea penalty case: TDSAT says no hearing today

Vodafone Idea (PC-Shutterstock) The telecom tribunal TDSAT did not hear any matter listed before it for Tuesday, including the Rs 3,050-crore cumulative penalty case of Bharti Airtel and Vodafone Idea. ... Read more »

Zee-Invesco row: Bombay HC grants injunction to Zee against calling EGM in Invesco case

ZEEL | Representative image The Bombay High Court granted injunction against calling extra ordinary general meeting (EGM) today in the Zee Entertainment-Invesco row. On October 22, the court reserved its ... Read more »

No compensation for private customer Vodafone after outage

Photo: ANP Vodafone’s private customers do not have to count on compensation for the failure at the telecom company on Monday afternoon. The group follows the legal regulations for compensation ... Read more »

Honda Cars partners Bank of Maharashtra for vehicle financing solutions

Bank of Maharashtra Honda Cars India Ltd (HCIL) on Tuesday said it has tied up with Bank of Maharashtra to offer vehicle financing schemes for potential car buyers. The partnership ... Read more »

UBS fee bonanza lifts quarterly profit to six-year high

source: Reuters UBS posted its highest quarterly profit since 2015 on Tuesday, as robust trading activity by the world’s ultra wealthy led to a 23 percent surge in fee income. ... Read more »

Pakistan Prime Minister Imran Khan dials Chinese President Xi Jinping; vows to boost bilateral, economic ties

Pakistan Prime Minister Imran Khan and Chinese President Xi Jinping on Tuesday agreed to further bolster their bilateral ties, including full realisation of the potential offered by the Phase-II of ... Read more »

Jaguar Land Rover cuts output due to chip shortage

Production cutbacks due to semiconductor shortages have continued for Jaguar Land Rover in the third quarter of FY22 with temporary shutdowns of three of its plants in October. The two ... Read more »

Drone flying framework in place: Key takeaways for operators

India has notified the National Unmanned Aircraft System (UAS) Traffic Management (UTM) policy framework for “seamless operations of drones in the airspace”, a release from the Drone Federation of India (DFI) ... Read more »

Buy Colgate-Palmolive India; target of Rs 1765: Emkay Global Financial

Emkay Global Financial’s report on Colgate-Palmolive India Colgate reported a 9% miss on earnings in Q2 due to lower gross margins amid higher input costs and higher ad spends. Volumes ... Read more »

Rahul Gandhi to visit Goa on October 30

Congress leader Rahul Gandhi. File image. Ahead of the Goa Assembly elections due early next year, senior Congress leader Rahul Gandhi will arrive in the coastal state for a day-long ... Read more »

‘Mortgage advisers often sell hot air with subscriptions'

Together with independent mortgage advisor IBF, the Consumers’ Association examined 18 subscriptions from 7 large mortgage chains, 3 large intermediaries and 8 smaller consultancy firms. IBF itself does not offer ... Read more »

Buy Tech Mahindra; target of Rs 1870: Emkay Global Financial

Emkay Global Financial’s report on Tech Mahindra Tech Mahindra’s Q2FY22 operating performance was better than expectations. Revenues grew 6.4% QoQ (7.2% CC) to USD1,473mn, led by Communication, Media & Entertainment ... Read more »

Dearness Allowance hike to 31% effective from July 1: Finance Ministry

Kerala had set up India’s first lottery department in 1967. Dearness Allowance for central government employees has been hiked to 31 percent of the basic pay from 28 percent with ... Read more »

India receives first LNG cargo from Yamal LNG project

India received its first import of liquefied natural gas (LNG) from Russia’s Yamal LNG project over the weekend, Refinitive Eikon LNG flows data showed. The cargo was supplied by Russian ... Read more »

PM GatiShakti | Recycling assets to transform the face of India's infrastructure

Representative image The announcement to synergise projects under a single masterplan to lower logistics cost, and promote last-mile connectivity under the PM Gati Shakti Plan has garnered support from all ... Read more »

Accumulate ICICI Bank; target of Rs 955: KR Choksey

KR Choksey’s research report on ICICI Bank Net interest income (NII) increased by 25% YoY to INR 11,690 Cr in Q2FY22 from INR 9,366 Cr in Q2FY21. The net interest ... Read more »
On free-english-test.com you will find lots of free English exam practice materials to help you improve your English skills: grammar, listening, reading, writing, ielts, toeic