Deciphering NSE’s ‘Execution Range’ circular.

May 10, 2014

The National Stock Exchange earlier this month rolled out a circular prescribing a ‘reference price’ & and an ‘execution range’ for Futures & Options contracts which was effective from Feb 8th, 2016. There seems to be some confusion in understanding the circular and this is our attempt to decipher it for you.

Option trading has been growing leaps and bounds contributing upto 75% of total exchange volumes, the most popular being the index (Nifty) options. But the liquidity (trading volume) is limited to present/near month contracts in index options and only a few stock option contracts.

With lower trading activity in most option contracts, there have been multiple incidents over the past few years when a market order has caused significant impact cost and eventual loss. Here’s an example:

Consider Bank Nifty currently at a value of 13050 in April and May 12500 Call since it is deep ITM (in the money) and because it is 2 months from expiry, having no liquidity to trade. Assume that someone has put a selling order at 900 for this option (ideally should be trading around 500) hoping to get lucky. In case if you decide to buy this option and instead of placing a limit order at around 500 you place a market order, your order will get filled at 900, causing a potential loss because of impact cost of Rs 10,000 (900-500 x 25 which is the lot size) per lot. The chances of such mistakes are higher when, you see an offer for 1 lot at 525 and you place a market order to buy 10 lots, 1 lot will get bought at 525 but the rest of the 9 lots would get bought at whatever is the price available in the market, in this case at 900.

To help protect the trader from such significant impact costs, National Stock Exchange (NSE) has taken several order and risk management measures to ensure orderly trading. NSE now says that orders shall be matched and trades shall take place only if the trade price is within the reference price and execution range of a particular contract.

How is the Execution range defined?

Execution range is the price range on both sides of the reference price of the contract only within which if orders are placed will be accepted, if not cancelled.

Reference price for each contract shall be computed as follows

  • At market open – Theoretical price derived from the underlying price. (Using implied volatility in case of options contracts and rate of interest which shall be revised daily with the applicable 30 days MIBOR rate) or base price of the contract in case underlying price is not available at the time of computation.
  • During Trading Hours – it shall be the simple average of trade prices of that contract in the last 1 minute. For contracts that have traded in the last 1 minute, the reference price shall be revised throughout the day on a rolling basis at 1 minute intervals.
  • For all other contracts the reference price shall be the theoretical price based on the latest available underlying price and shall be revised throughout the day at regular intervals. (30 minutes)

So the execution range on both sides of reference price would be:

Now, coming back to the bank nifty example, with the 40% execution range in place (since premium > 50), your market order will get executed only in the range of 300 to 700 (anything beyond this will get cancelled).

Important:

  • The ‘Execution range’ is available only for Futures and Options trading on NSE.
  • The ‘Execution range’ is applicable for near month, mid month contracts and far month contracts.
  • The Exchange does not make the reference price available to the Stock broker. As a result you will not be able to see the Execution range on Zerodha Trader yet.
  • All orders above or below the range will be cancelled immediately, so ensure to double check your open positions when you place market orders in illiquid contracts.

This initiative of the Exchange is laudable as it safeguards the interest of traders and is applicable on all F&O contracts (near month, mid month contracts and far month contracts).

Edit: Effective February 8th, 2016, NSE has made the changes on execution range for NFO and CDS as mentioned in the attached circulars.

Do post any queries you may have.

46 comments

  1. Janvi says:

    is this supposed to affect only those who use Market/SL-L orders or even those who use Limit order?

    • If you are placing a limit order, you would know the price, so wouldn’t affect unless you do a mistake while placing the limit order. For example assume a certain call option best offers are 1 lot at Rs 30 and 20 lots at Rs 60, if you by mistake place a limit order to buy 20 lots at Rs 60, you could have still lost quite a bit as 1 lot would get bought at 30 and the rest 19 at 60. But with the new execution range, 1 lot will get bought at 30, but the rest of the order will get cancelled as the price available is above the execution range. The execution range in this case would be 24 to 36 ( 20% above and below 30).

      • Vimal says:

        Can we trade leap nifty options in zerodha ? Its span margin is same as near month margin ?

      • Hiten Doshi says:

        Hello Nithin Sir

        At the outset let me congratulate you and for all the wonderful work you and your team are doing. I am a huge fan of Team Zeordha .

        I mostly OTM Options. I have spoken to your people a couple of times but have not been satisfied by the answers provided ( i am sure they are only saying what they are empowered to do/say )

        Today, 08.12.17, I wished to write a Jan’18 Bank Nifty 27000CE @ 64.90 ( the rate had already been traded at and there was a buyer and seller at similar rates ) , but due to limit restrictions my order would not go through. Similarly for the 23500PE. They suggested i should write at closer strike prices but then i am not willing to increase my risk.

        There are no margin issues, others are being able to trade at the rates and i am not increasing any risk as i am Deep OTM. I wish there is a way to resolve this.

        Thanks & Regards

        • Matti says:

          Not right now Hiten. The exchange has a regulation that states that a broker can have only 15% of the marketwide OI as open positions for all his clients combined. As such, we’ve had to restrict the strikes our clients can trade so we don’t hit this limit (no other broker has ever hit these limits for index options). If we do hit this limit, nobody would be able to trade these scrips and that is a worse situation. We’re in talks with the exchange to find a solution to resolve this.

    • Satinder Kumar says:

      Today, We tried to sell Bank nifty option “BANKNIFTY16AUG1828400CE NFO” @ 09:21:12 and it got rejected multiple times..

      Rejection reason “RMS:Rule: Option Strike price based on Ltp percentage for entity account-RN3971 across exchange across segment across product”.

      And this happens very frequently.

      Because of this we may have to enter into more nearest stike price, which increases the risks? Could you specify the reason and login behind it.

  2. Anurag Rana says:

    Thanks Nithin for this explanatory blog post. Any reason why the reference price is not applicable for the same month expiry? (Apart from the fact that they don’t have liquidity issues and lower volumes)

    Also, if i understand this correctly, i can assume the likelihood of the following scenario:

    Suppose i am sitting on profits and holding 100 lots of 7000 CE call (trading at Rs.294), and tomorrow i want to close my position by putting a MARKET sell order when it touches Rs.300, so assuming that the reference price system is not applicable, i could get a fill of anything below Rs.270 (10%) also for some or all of my lots?

    • I guess very soon it will be applicable for the same month, as many stock options are quite illiquid.

      Yep, as of now without an execution range, if you place a market order it can basically get executed at any price where the liquidity is available (anything below 270 also).

  3. Anurag Rana says:

    Okay, that clears it up for me. Thank you so much for the personal attention and great support. Really appreciate it man.

  4. DC0267 says:

    hi nitin sir
    reference price system yea liqued contract par bhi aplicable hai

    ager main koi contract 1 month pahle sell karta hue (@100 rs. preamum banknifty) to use limit order pe buy kar sakta hue ki nahi after 20 day (@10 rs)

    “sorry mera thoda english acha nahi hai”

  5. Venu Madhav says:

    NSE vide circular 26762 has implemented this mechanism for all near month contracts too. Reference: http://www.nseindia.com/content/circulars/FAOP26762.pdf

  6. Sukesh says:

    I believe this wont be impacting much for the ‘At the Money’ Nifty contracts because they are the most liquid F&O trading in India..

    Correct me if I am wrong.

    Thanks..

  7. Anant Patil says:

    Hi,

    Today i have bought AMTEKAUTO CALL Option with strike price 50 at 0.80 and when i want to book profit at 32 pi is not executed my order with message “17070 : The Price is out of the current execution range”.
    After trying so much time finally i booked my profit at 9.80.
    So why my order is not executed at 32 when i was on profit of 58000 Rs.
    I lose my profit of 58000 Rs due to this message and booked profit at 18000 Rs.
    I have attached my order details, please check why this happened.
    Please find the attached copy for your reference.
    Waiting for your quick reply.

    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 2000 2000 0 9.8 0 complete
    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 0 0 2000 0 0 cancelled 17070 : The Price is out of the current execution range
    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 0 0 2000 0 0 cancelled 17070 : The Price is out of the current execution range
    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 0 0 2000 0 0 cancelled 17070 : The Price is out of the current execution range
    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 0 0 2000 0 0 cancelled 17070 : The Price is out of the current execution range
    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 0 0 2000 0 0 cancelled 17070 : The Price is out of the current execution range
    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 0 0 2000 0 0 cancelled 17070 : The Price is out of the current execution range
    NFO NRML AMTEKAUTO15SEP50CE MKT SELL 2000 0 0 2000 0 0 cancelled 17070 : The Price is out of the current execution range
    NFO NRML AMTEKAUTO15SEP50CE L BUY 2000 2000 2000 0 0.8 0 complete

  8. S S Dahale says:

    why my orders to sell futures of JUST DIAL July 2016 were rejected today 31 may 2016-tuesday by 3.15 PM to 3.30PM ( for price 640,638.55,640), though there were purchasers at 640,638,625 and seller at 645 also for reasons “The price is out of current execution range “, though the prevailing price was much above for that contract at 645, underlying price of equity just dial was 677 at that moment , though today’s low of equity just dial was 640.50 at 9.29 hrs , high of equity just dial was 680.90 at 14.25 hrs, though i could manage to sell 2 contracts of just dial July 2016 earlier at -626.85, and -641.35, kindly put your views…why this happened

  9. guneet singh says:

    is there and cap on the number of lots one can buy in the nifty options index. suppose i want to by a 21000 lots of nifty 9000 at strike price of say 50 and later sell the same at say 50.10. what are the possible difficulties that i may face due to circuit breakers?

  10. M.Srinivas reddy says:

    Sir today suppose I buyed Banknifty 19700 September call optionat 78. And tomorrow if banknifty raises by suppose 500 points can I put AMO order in morning for aroundRs. 300 sir.whether my AMO orders gets rejected.bank nifty options are liquid

  11. M.Srinivas reddy says:

    Sir today auropharma closed in NSE at 835 and in BSE it closed at 832. Sir I have 2 doubts.today can I buy in BSE and sell tomorrow in NSE.Another doubt is since it closed high in NSE today when compared to BSE, is there any chance the price of Auropharma will godown in NSE tomorrow.or will there be any chance prices gets same in both exchanges tomorrow.please explain the concept clearly

  12. Sandeep says:

    Sir suppose in bank nifty weekly expiry 23600 CE price is rs15 ,23500 PE is rs20.and I want to buy when it goes CE 17.60 or PE goes 23 then my limit order execute what I do to execute the limit order my order is executing in market order.

  13. Menaakshi Gupta says:

    Hi,

    I had purchased 1000 banknifty 24700 CE 21SEPT17 (high volume option on a weekly expiry day) expiry in the morning, in some time(10:01am) of the day, price moved to 32. I hit the sell button with price 18, thinking that it will get executed at best price. But the order got cancelled even at that time the market price was between 23-24. The error was same as mentioned out of execution range. can any please explain why so, wanted to take this to Exchange, since i am not convinced.

  14. ICGARG says:

    Sir,
    Thanks for giving an opportunity to put such queries for layman investors like me.I sold banknifty 24000Sep 17 PE @25.45 IN BRACKET ORDER WITH SLM OF 20 POINTS AND TARGET ALSO 20 POINTS QUANTITY 520 at 10:04 hrs on 27 September. Upto here all was in order at around 10:30 I noticed that in my a/c MTM WAS increasing and in order book target as well SLM order was vanished and it was not shown in trade book also.Hence I contacted broker’s helpline who confirmed that both the target and SLM order are still open,On my instructions which was closed at market price of 110 which resulted me a loss of around 42000 RS.
    Now broker replied me that order was cancelled by NSE with error code 17070 order beyond execution range.I have fwded the complaint to NSE also How exchange can cancel the order without informing me or my broker.The loss could have been to 3 lacs if I had not taken the initiative to call helpline.Nobody informed me about the order cancelation.Now who will bear the loss Either NSE OR BROKER OR INVESTOR.
    PLEASE DO REPLY

  15. Sandhiya says:

    Today i placed an order for 1 lot of TATAMOTORS18APRFUT, but it was rejected.
    Why it was rejected.

  16. Anil says:

    Hi, Does this mean that if someone purchases say a 5Rs OTM Call option on BankNifty (lets say at whatever strike), will this person have any upside capping to the gains due to this rule i.e. will his payout get capped at say 100,500,1000 or it will truly be unlimited as it should ideally be in case of call options. Kindly clarify

  17. anant bhat says:

    my F& O order get cancelled even my funds are available.Like LICHSGFinance 400 CE,JSWSTEEL sep 430 CE.
    what is the problem.

  18. Rony Zacharia says:

    Today morning I bought 100 quantities of BANKNIFTY13DEC1827000CE @ Rs.49.1. Later at noon when I tried to buy the same qty again at price Rs.44 (in fact I tried different price between 43 and 49), getting rejected each order immediately with below reject reason.

    RMS:Rule: Option Strike price based on Ltp percentage for Buy Orders for entity account-YL9667 across exchange across segment across product

    can you explain the reason with the above scenario ?

  19. Shivashish says:

    I am trying to buy out of money put for BankNifty for 29000 strike. But i am getting the same message whether i try it for Mar, Apr or May expiry. –

    BUY 20 x BANKNIFTY MAR 29000 PE is rejected.
    Strike price is outside the allowed range. Try a strike closer to the spot price.

    BANKNIFTY19MAY29500PE buy order also received same message.

    Please guide me regarding the range of puts that i can buy which is acceptable.

  20. Arun Vasantrao Galgali says:

    What is the Strike price & Spot price in case of Options trading? Also let me know why the option orders are rejected with the reason that Strike price is outside the allowed range & try a strike price closer to the spot price. This happened in my case though I was placing Buy order in Bank Nifty 14 August 28500 CE at the price it was trading at that point of time.

    • Matti says:

      I suggest you check out this Varsity module for an answer to your first question. For your second question, your order would have been rejected because there’s an exchange restriction on the total OI a broker can hold. Due to this, we have to limit the range of tradeable strikes. Explained in detail here.

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