Recently, one common factor that impacted traders and investors in the F&O segment was the trading ban on individual stock derivatives. For instance, NSE has currently barred traders from taking any positions in derivatives in 11 stocks — RBL Bank, GMR Infrastructure, BHEL, Metropolis Healthcare, Gujarat Narmada Valley Fertilizers And Chemicals, Delta Corp, Hindustan Copper, India Cements, Indiabulls Housing Finance, Punjab National Bank, and Manappuram Finance.

Usually, a scrip attracts a trading ban ahead of some corporate events such as results, M&A, government’s policy announcements, etc, due to the speculative nature of trades. So, trading ban does not surprise marketmen if it precedes those eventful days. But the number of scrips getting into the ever-expanding list is raising a few eyebrows.

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Frequent scrips

What is even more surprising is that a few scrips like Balrampur Chini, GNFC, Hindustan Copper, Indiabulls Housing Finance, India Cements, Manappuram, Piramal Enterprises, and PNB have featured in the ban list on most trading days.

F&O ban is a regulatory measure to prevent excessive speculative trading in a scrip. Exchanges impose a trading ban on a particular scrip when aggregate open interest positions of that particular stock hits 95 per cent of the market-wide position limit (MWPL).

F&O mechanism

The open interest is nothing but all outstanding (buy and sell) positions in a stock in futures and options contracts. The MWPL is the lower of the 30 times the average number of shares which are traded daily during the preceding month, or 20 per cent of the number of shares held by non-promoters (free-float).

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During the ban period, no new positions are allowed for traders, and those who already have exposure in the scrip are allowed only to unwind their positions. The ban is lifted only if the MWPL of the scrip falls below 80 per cent. Besides, if a scrip is under F&O trading ban, then traders cannot roll over their existing positions to the next month. However, intraday trades are allowed, as the open interest remains unaltered.

So, if a scrip enters a ban list, what does that signal for the stock price? The trend is mixed. For example, in the above list, Indiabulls HF jumped over 37 per cent; Hindustan Copper gained 15 per cent; and India Cements moved up nine per cent; on the other hand, GNFC tumbled five per cent and PNB three per cent in the last one month.

Cautious trading

So, traders need to be careful on these stocks. In fact, NSE offers information regarding MWPL for all scrips on a daily basis. Besides, an alert is displayed once the open interest of F&O contracts crosses 60 per cent of the predetermined MWPL so that traders can be cautious.

A prolonged trading ban is not good for a vibrant market. This will only increase intraday activity in F&O which is not good for the overall market and may lead to systemic risk too. Maybe exchanges can tweak the rule either to remove the stock temporarily from the F&O list and reintroduce once the noise is settled or increase the free-float criteria to 25-30 per cent, so that they don’t often hit the MWPL trigger.


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