The steep fall in one stock often has a domino effect as players who lose heavily in that stock start unwinding positions in other stocks or futures to make up for the losses
The Securities and Exchange Board of India (SEBI) may consider daily price limits -- circuit filters in market parlance -- even for stocks that are part of the future and options (F&O) segment, a source told Moneycontrol.
This follows the precipitous falls in some midcaps over the last couple of weeks, with share prices of some companies more than halving in a single trading session.
Another source said exchanges have asked SEBI for guidelines on price bands for F&O stocks.
On September 21, shares of Dewan Housing Finance fell nearly 65 percent on reports that its 1-year commercial paper, due in June 2019, was sold by DSP Mutual Fund at a deep discount. A week later, on September 28, shares of e-commerce player Infibeam fell by close to 70 percent.
In light of these episodes, both exchanges and broker associations felt the need for circuit filters in the F&O segment. SEBI is considering forming a working group to establish if there is a need for circuit filters in the segment, and if tightening the entry of stocks in the segment is necessary.
The steep fall in one stock often has a domino effect as players who lose heavily in that stock start unwinding positions in other stocks or futures to make up for the losses.
The thinking behind not having a circuit filter in stocks part of the F&O list was that a steep fall or rise in the stock price could be tempered as investors took opposite positions in the futures market. So when prices plunge, investors who have sold the stock can hedge their positions by buying futures or even make a trading gain.
Similarly, when prices rise sharply, investors who have bought the stock sell the futures, either to hedge their positions or make a trading profit.
But this assumption doesn't take into consideration that in times of panic, traders may not try to profit from the situation by taking opposition position in the futures.As of now, there are 204 stocks in F&O segment. "Exchanges should do qualitative analysis before taking stock into F&O segment including default history or rating agencies as many retail investors also participate in derivative segment," a market expert said.
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