The National Stock Exchange of India plans to introduce a four-step confirmation process for trading in options in a bid to curb abnormal price movements in derivatives.
The four-step system has already been implemented for futures contracts. Alerts are generated if the order price exceeds or is equal to a certain percentage of the reference price for buy orders and is less than or equal to that threshold for sell orders. The threshold value is 3 percent for index futures and 5 percent for stock futures.
“The exchange is shortly introducing a similar alert system for options,” a person aware of the development told Moneycontrol. “The exchange has directed its members using customised front-end systems to build similar alerts.”
For options of up to Rs 50, the proposed alert will be generated when the price exceeds or falls below the reference price by Rs 20. For options above Rs 50, the trigger will be 40 percent above or below the reference price.
Brokers have raised concerns over sudden price spikes in the options segment. Most recently, on August 21, traders noticed a spike in some options contracts on the NSE. The call option contract for the NSE’s main Nifty index for August expiry rose by 800 percent and a put option contract for the Bank Nifty index strike price rose by 2,000 percent.
The NSE did not immediately respond to Moneycontrol’s queries on the proposed order-verification changes being introduced for options.
In mid-August, the NSE tightened pre-trade risk control measures for index futures.
Dealers now get a warning-cum-reconfirmation pop-up on their systems if the price of an order varies by a certain percentage from the reference price – either the base price or the last traded price – in futures contracts. Dealers will then be required to either cancel the order or re-confirm the price.
“Compared with normal orders where a two-step confirmation is required, for such orders, a four-step confirmation will be needed to place the order after getting an alert,” another person told Moneycontrol.Market experts said such measures are expected to reduce the chances of “fat-finger errors” (mistakes caused by people and not computers) and also make it tough for unscrupulous elements to provide tenable reasons for entering orders that deviate excessively from normal prices.