Futures Trading at National Stock Exchange (NSE): A Comprehensive Overview, Study notes of Financial Management

Download Futures Trading at National Stock Exchange (NSE): A Comprehensive Overview and more Study notes Financial Management in PDF only on Docsity! FUTURES TRADING AT NSE : A PREMIER The derivatives trading on National Stock Exchange (NSE) has commenced with S&P CNX Nifty Index futures on June 12, 2000. Single stock futures were launched on November 9, 2001. Currently, the futures contracts have a maxium of 3 months expiration cycles. Three contracts are available for trading with 1 month, 2 month and 3 month expiry. A new contract is introduced on the next trading day following the expiry of the near month contract Trading Mechanism: The Futures and Options trading system of NSE is called NEAT – F&O trading system. It provides a fully automated screen based trading for Nifty Futures and Options on a nation wide basis as well as an online monitoring and surveillance mechanism. It supports an order driven market ad provides complete transparency of trading operations. It is similar to that of the trading of equities in cash market segment Basis of trading: 183 The NEAT – F&O segment supports an order driven market, wherein orders match automatically. Order matching is essentially on the basis of security, its price, time and quantity. All quantity fields are in units and price in rupees. The lot size on the futures market is for 200 Nifities. The exchange notifies the regular lot size and tick size for each of the contracts traded on this segment from time to time. When an order enters the trading system, it is an active order. It tries to find a match on the other side of the book. If it finds a match, a trade is generated. If it does not find a match, the order becomes passive and goes and sits in the respective outstanding order book in the system Order types and Conditions: The NEAT – F& O allows different types of orders with various conditions attached to them to meet out the requirements of players. Based on the type of conditions, the orders may have: F 0 B 7 Time conditions F 0 B 7 Price conditions F 0 B 7 Other conditions Further, a combinations of above conditions create a wide variety of flexibility to players . Based on the above said conditions, the order types differ. A list of them are as follows: 185 Price conditions: Based on the price conditions, follwing forms of orders emerge: F 0 B 7 Stop – Loss order: This type of order allows the user to release an order into the system when the price of the security reaches a specific price limit. For example, a trader has placed a stop loss buy order with a price trigger of Rs 3327 and Rs 3330 (limit price), his order will be executed the moment the market price reaches the level of Rs 3327 and it would be stopped when the price goes beyond Rs 3330 Other conditions: Based on other conditions, the orders may be classified as follows: F 0 B 7 Market Price Orders – For these orders no specific price is mentioned by the buyer or seller at the time of entering. The prevailing market price is considered for these types of orders F 0 B 7 Trigger Price: Trigger price refers to that price at which an order gets triggered from the stop loss book 186 The purpose of market watch window is to allow continuous monitoring of contracts or securities that are of specific interest to the users. It displays the trading information for contracts selected by the users. The user also gets the information about the cash market securities on the screen Inquiry window: This window enables the user to view information as to Market by Order, Market by price, previous trades, outstanding orders, snap quotes, order status, Market movement, Market Inquiry, Net Position, etc Placing orders on the Trading System: The Futures market is always a zero sum game. The total number of buy positions should be equal to total number of sell positions. Total number of outstanding contracts (long/short) at any point of time is called ―Open Interest‖ . It is an important indicator of the liquidity in every contract. Usually, the open interest would be high in case of near month futures Members can enter their orders on the trading system, however, they have to identify the order as that of their own or for their clients. The account numbers of the trading members and clients are to be specified