{"id":3127,"date":"2014-05-10T16:35:56","date_gmt":"2014-05-10T11:05:56","guid":{"rendered":"http:\/\/zerodha.com\/z-connect\/?p=3127"},"modified":"2024-02-02T15:35:00","modified_gmt":"2024-02-02T10:05:00","slug":"deciphering-nses-execution-range-circular","status":"publish","type":"post","link":"https:\/\/zerodha.com\/z-connect\/general\/deciphering-nses-execution-range-circular","title":{"rendered":"Deciphering NSE’s ‘Execution Range’ circular."},"content":{"rendered":"

The National Stock Exchange earlier this month rolled out a circular<\/a> 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\u00a0attempt to decipher it for you.<\/p>\n

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.<\/p>\n

With lower trading activity\u00a0in 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:<\/p>\n

Consider Bank Nifty currently at a value of 13050 in April and May\u00a012500 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\u00a0(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.<\/p>\n

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.<\/p>\n

How is the Execution range defined?<\/h3>\n

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.<\/p>\n

Reference price for each contract shall be computed as follows<\/p>\n