Equity derivatives trading in India is primarily conducted on an **Order-Driven** system. This system automatically matches buy and sell orders based on predefined rules, primarily **Price-Time Priority**.
Order-Driven System: Orders are matched automatically in a transparent electronic book. Orders are ranked by price, then by the time they were entered.
Quote-Driven System: This is an alternative system where market makers provide bid/ask quotes, and other participants trade against these quotes. This is less common in Indian equity derivatives markets.
8.2 Types of Orders 📝
Market Order: An order to buy or sell a security immediately at the best available current market price. It guarantees execution but not a specific price.
Limit Order: An order to buy or sell a security at a specified price or better. It guarantees the price but not execution.
Buy limit orders must be placed at or below the current market price.
Sell limit orders must be placed at or above the current market price.
Stop-Loss Order: An order to buy or sell when the price of a security moves past a certain point, converting to a market order. It is used to limit a loss or lock in a profit.
Stop-Limit Order: An order that is a combination of a stop-loss and a limit order. It converts into a limit order once the stop price is triggered, guaranteeing the price but not execution.
8.3 Order Matching and Priority ⏰
The core principle for order matching on Indian exchanges is **Price-Time Priority**.
Price Priority: A buy order with a higher price has priority over a buy order with a lower price. A sell order with a lower price has priority over a sell order with a higher price.
Time Priority: At the same price, an order that was entered earlier has priority over a later order.
8.4 Position Limits 📊
To prevent excessive speculation and market manipulation, exchanges enforce position limits at various levels:
Market-wide Position Limits (MWPL): The maximum open interest a security can have across all exchanges.
Member-wise Position Limits: The maximum position a trading member (broker) can hold on a particular derivative contract on behalf of all their clients.
Client-wise Position Limits: The maximum position a single client can hold on a particular derivative contract. These are typically set at a percentage of the market-wide limit or a fixed number of contracts.
8.5 Price Bands and Circuit Breakers 🛑
Price bands and circuit breakers are risk management tools to prevent extreme volatility and sudden price crashes or spikes. In the derivatives market, these are dynamic and tied to the previous day's closing price.
Price Bands: For index options and futures, these are not applicable in the same way as in the cash market. Instead, exchanges have **dynamic price bands** that are calculated based on the previous day's closing price and a specific percentage deviation.
Circuit Breakers: Market-wide circuit breakers are applicable to the **index** and are triggered when the index moves beyond specific percentages (e.g., 10%, 15%, 20%). They halt trading on all equity and equity derivatives markets.
8.6 Trade Modification and Cancellation ✏️
Orders can be modified or cancelled as long as they have not been fully executed. A modification can change the price, quantity, or other parameters of an order. Once an order is fully matched and executed, it cannot be cancelled or modified.
8.7 Surveillance Mechanisms 🕵️♀️
Exchanges and SEBI have robust surveillance systems to monitor trading activity and detect potential misconduct, such as:
Insider Trading: Using non-public information to trade for personal gain.
Market Manipulation: Activities like creating artificial demand or supply to influence prices.
Front-Running: A broker trading on their own account before executing a client's large order.