Prevent Shares from Entering Trading Ban

In the futures and options (F&O) segment, the number of stocks entering trading ban has been on the rise lately. Just ahead of June expiry, shares of 14 companies were banned by the NSE, as the aggregate open interest positions in these scrips had exceeded 95 per cent of the marketwide position limit.

Normal trading in the scrip is resumed only after the aggregate open interest across exchanges comes down to 80 per cent or below the marketwide position limit. Till such time, trading members can trade only to reduce their positions by offsetting them till normal trading in the stock is resumed.

According to the prevailing norms, the marketwide position limit should be lower of either 30 times the average number of shares traded daily during the previous calendar month in that particular security in the equity segment or 20 per cent of the number of shares held by non-promoters (free-float).

With an increasing number of stocks under trading ban, even at the start of the second week of an F&O cycle, genuine traders and investors are finding it difficult to enter the derivative segment.

Wilful acts

There are apprehensions in some quarters that a few operators are exploiting the situation by not allowing others to take a position in contra to their holding by entering the cheap deep out-of-the-money options. A tweak in the existing norms can improve efficiency and liquidity in the F&O market.

Instead of 20 per cent free-float, it can be hiked to 30 or 35 per cent or even 50 per cent; 30 times the average number of shares traded can be increased, if not dispensed with. This will give more headroom to F&O traders.

Compartmentalised F&O

Alternatively, as against the current norm of adding all open positions across derivatives to calculate the limit, the limit can be compartmentalised between futures and options by dividing the total limit into two — either in 30:70 or 40:60 ratio. For e.g., if the limit is 10 lakh for an underlying, three lakh can be allocated to futures and the rest to options. This will ensure uninterrupted trading in the contract, at least in futures.

And even in the options segment, deep out-of-the-money options should be given limited headroom, so that near and at-the-money options can be made more liquid.