Clients with cover orders could get hit because of NSE trading disruption

Trading has been halted on the National Stock Exchange since 11:40 pm as prices for the cash as well as derivatives segments were not updating for more than an hour.

The exchange has communicated to brokers that all pending orders in the system when trading was halted, will be cancelled, and fresh orders will have to be put in during the pre-open session.

Brokers told CNBC-TV18 that clients who have put in cover orders could be hit if the prices on resumption are below the stop loss (for traders with long trades) or above the stop loss (for traders with short trades).

What exactly are cover trades?

Here’s an explanation on the website of Motilal Oswal: When you enter into a trading position in the cash market or an intraday trade or even in futures there is a margin that you need to pay. The margin is for the broker to cover the risk of your trade and even the exchange insists on a minimum margin to be collectible. What if you want to pay a lower margin (in other words you want higher leverage), then what should you do. In that case, you can opt for Cover Orders (CO) or for bracket orders (BO). What is a cover order in stock? These are orders with an in-built risk mitigation mechanism. The benefits of cover orders are that they not only reduce the risk for the broker and the trader but also enable the trader to get higher leverage. Let us understand cover order trading in greater detail and how it works in practice.

How do cover orders reduce the risk for brokers and traders?

In simple terms, a cover order is a market order that is placed along with a Stop Loss order. You can use cover orders in case of long trades and in case of short trades too. The important part of the cover order is that it has to be placed along with the stop-loss order at the time of placement of the order itself. Once the cover order is placed, the SL order cannot be cancelled as it will make the entire concept of the cover order invalid. So what exactly does this cover order do?

Since the cover order includes the stop-loss order also at the time of order placement itself, it reduces the risk for the broker and for the trader.

Source: CNBC-TV18