The National Stock Exchange on July 6 sought the reason for placing an order for certain Nifty futures trades at a significantly higher rate than the prevailing price.
The exchange has received some inquiries about certain Nifty futures trades that were higher than the prevailing price on July 5, 2021.
The country's leading exchange clarified that on July 5 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 that was significantly higher than the prevailing price in the market.
Also Read: NSE seeks reason from a member for certain Nifty futures trades order at significantly higher price than prevailing rate
Gaurav Garg, Head of Research, CapitalVia Global Research Limited helped us to decode what happened and what should investors’ watch out for:
On July 5, 2021, the near-term Nifty future reached a high of 16546 in the first few seconds after the market opened, despite the Nifty spot opening at just 15793.
The NSE on Tuesday said that a trading member's dealer placed a manual buy order for Nifty Near Month Futures in the first few seconds after the market opened, at a price that was substantially higher than the market's prevailing price.
The order matched with existing sell orders in the order book since it was within the operating range and the transaction was successfully taken place. In addition, the NSE claimed that it had ordered an explanation from its members as to why they had placed a trade at a significantly higher price than the market's existing pricing, however, India's largest exchange did not reveal the broker’s identity.
What is a manual buy order?
A manual trade does not rely on automatic signals to make buy and sell decisions. They also manually enter trades into a trading system, which raises the possibility of inaccurate or erroneous order entry.
So, when the exchange said about the "Freak Trade," it claimed it may be due to human error or Manual orders that were entered by a human and may have placed the order by mistake, resulting in market chaos.
What led to the price rise?
Unlike the market moving in the bullish direction, the higher price (16546) is due to an error; the exchange has explained that a trading member's dealer placed a manual buy order, causing the index to open at a higher price.
The order matched with existing sell orders in the order book since it was within the operational range, and two trades were executed at a price within the trade execution range. The exchange also said that more than one broker was involved in this.
Has it happened in the past as well?
On October 3, 2013, Nifty October futures traded at 5,996, which was 100 to 106 points higher than the last traded index level. The futures plummeted to a level of about 5,896 in seconds, leading many analysts to conclude that the deals at the top were odd.
On September 27, the same year (2013), the Nifty index options had fallen by 90%. The call option premium for Nifty strike price of 5,700 fell by 88 percent to Rs 21 from Rs 180, and the ‘put' option premium for Nifty strike price of 6,000 fell by 98 percent to Rs 1.30 from Rs 118. Both options, on the other hand, recovered in a matter of seconds.
What should investors do in case they get stuck?
Traders who use a stop loss may not lose much money since their losses are kept to a minimum, while those who don't use stop loss, can lose a lot of money.
Because these types of situations are typically controlled by single-digit brokers or dealers, the investors should close their positions at a minimal loss rather than waiting for the market to move in their favor.Disclaimer
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