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News Topical, Digital Desk : The National Stock Exchange (NSE) has changed the quantity freeze limits for index derivative contracts. The prescribed number of lots to be placed in an order is called the quantity freeze limit. These new limits will come into effect from September 1. According to the NSE circular, the new freeze limits for major indices will be as follows -
- Bank Nifty - 900
- Nifty 50 - 1,800
- Finnifty – 1,800
- Nifty Midcap Select - 2,800
- Nifty Next 50 - 600
Let us know what are quantity freeze limits and what is their role in the equity derivatives segment?
What are quantity freeze limits? Quantity freeze limits are the maximum order size of a fixed F&O contract. Exchanges usually set such limits to prevent large or erroneous orders that can hurt market stability. Stock exchanges change these limits from time to time and as market levels rise, exchanges also usually increase the freeze limit, as NSE has done in its latest amendment.
How effective are these limits? Quantity freeze limits are very important. For example, an order of 1,000 lots of a contract may inadvertently be punched as 1,00,000 lots. In such a situation, quantity freeze limits play an important role because such a large or unknowingly punched order will not be executed. Because no order can exceed the quantity freeze limit. Any order exceeding this limit will be automatically rejected by the exchange system. However, some investors have devised a way to circumvent quantity freeze limits. This is called an 'iceberg order'. In fact, institutions often place orders that exceed the quantity freeze limit. An iceberg order divides a large order into smaller parts and the size of each part is fixed below the quantity freeze limit. In such a situation, the system will not reject any order and the investor will be able to hold more lots than the freeze limit.
Is there any threat to the market? The regulatory framework of the Indian capital market is quite strong. The Securities and Exchange Board of India (SEBI) and the exchanges have taken several measures to deal with such challenges. Apart from quantity freeze limits, these include several methods including market wide position limits and client/broker position limits.
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