Tuesday, May 13, 2014

Revision in PriceBands on NSE Cash Markets and Derivatives Markets

NSE came out with a revised guidelines for Revision in Price bands on Stocks Where there are no Price bands. The Circulars are (Here) for Cash Market and (Here) for Derivatives Market.


As per new guidelines 

a) Circuit will be opened only after there are at least 10 trades at Circuit Price.

b) The trades should also be from multiple Unique Client codes (UCC) on both sides.

With this guidelines the dynamics of Price bands would change, There will be many more Market Micro-structure issues which will come in to play which can be detrimental to smooth price discovery process.

The various scenarios where Price Discovery would be impacted are

a) What happen If multiple trade takes place in cash and price moves up in cash segment and 10 trades does not take place in FO market because of higher price in cash.

b) If I put to buy /  Sell  100000 shares of XYZ at circuit, then as per the circular, The Circuit would not open the circuit till I get 100000 shares and then another trade takes place (Multiple trades on both sides with different UCC )

c) If there is an upper circuit in pre-open session, the cash price would go up at the open of market, what about FO market ?

d) When a new future contract is opened, It calculates fair price using Base Price, If there is a big difference in Base price and traded price then , would Exchange still not open the band ? (eg India VIX far week contract)

e) The circular specifically says that 10 trades at price above 9.9 % with multiple UCC, Do NSE have liberty to open the band over ruling this logic?

f) What if 10 trades takes place in BSE and Not in NSE or Vice- Versa ?

g) Also If Price in Cash Market goes up, But not in FO because of Band, Will Options Bands be opened ?

The basic intention of Exchanges for such circulars was to reduce stray / Outlier trades, and It is tough for Exchange to allow dynamic price bands and alsoreduce wrongs trades which are also detrimental to price discovery.

But NSE can opt to issue clarifications to reduce confusion and for better price discovery of prices.

I have sent a mail to NSE, highlighting this issues and this write up should be taken positively for my endeavour towards better price discovery and lesser Distortion of Prices in Market.

This is not a recommendation to anybody whatsoever to buy OR sell this share, but it is my thought process and views on this topic.

I welcome your critical comments and suggestions.