NSE warns trading members against trades from 'unrealistic prices'

This comes a day after a 'fat-finger' trade was executed in derivatives segment

The National Stock Exchange (NSE) warned trading members against trades arising from orders placed at “unrealistic prices”, which the bourse said is leading to aberrations in the normal price discovery process.

“Members are strictly advised to desist from entering orders or executing transactions which, prima facie, appear to be non-genuine on their own account and/or on behalf of their clients and refrain from indulging in practices which lead to aberrations in the order book,” the exchange said in a circular.

The warning comes close on the heels of a fat-finger trade that got executed in the derivatives segment on Thursday.

The NSE has warned that non-compliance with the circular could lead to deactivation of trading terminals.

On Thursday, a large quantity of Nifty50 options contracts with strike price 14,500 (June 2 expiry) got executed at Rs 0.15 per unit.

The Nifty50 index on Thursday closed at 16,628. As a result, the Nifty 14,500 strike option contract was in-the-money by over Rs 2,100. The option contract closed at Rs 2,130.5 on Thursday, up 5 per cent over the previous day’s close. It hit a high of Rs 2,139.85 and a low of Rs 0.15, exchange data showed.

About 1.25 million units got traded at Rs 0.15. Market players said this was on account of a punching error where the trader sold 14,500 call options instead of 16,500 call options.

Market players said trading members have developed algorithms to take advantage of any price anomalies. As a result, trades punched due to human errors get executed within a fraction of seconds.

The names of the trading members involved couldn’t be ascertained. Industry players said the seller could have incurred a loss of over Rs 200 crore, while the buyer made windfall gains on the transaction.

A fat-finger trade is the one that is triggered by a human error or the pressing of the wrong key when using a computer to input data.

Sources said the exchange was probing whether the trades were indeed caused by human error or if there was some other motive behind it. The NSE is expected to submit a report to the market regulator Securities and Exchange Board of India (Sebi) on the matter.

“The exchange continues to observe instances, whereby few trading members are placing orders on the exchange platform at prices which do not reflect the current market price and are far away from the last traded price. Instances are also observed where trading members are placing orders on the exchange platform at prices which are at the extreme end of the operating range defined by the exchange and have no apparent economic rationale when compared with last traded price or underlying price movement. The exchange has also observed that some of such orders placed at the extreme end of the operating range, lie passively in the order book,” the NSE said in a circular.