Saturday, 8 August 2015

Why No Circuit Limits for FNO Stocks ?

Why No Circuit Limits for FNO Stocks ? A big question flashing in many investors minds.The reason there are circuit filters while trading stocks is to ensure there is a breathing space and curb any easy manipulation of stock prices, when suddenly the prices start going up and down significantly. This is typically required especially more when the liquidity in the stock is not that great.
Consider F&O stocks now. Firstly, the stocks that qualify for F&O list are those which qualify the liquidty criteria. Also because there are F&O contracts on a particular stock, this signifies that there will be enough resistance coming in when the market suddenly start moving in one direction slowing down any price moves up and down.
Assume a stock is trading at Rs 100, and this is also on F&O. In F&O assume there are 1crore open futures on this stock. What this means is that there are 1 crore long futures and 1 crore short futures. If market suddenly starts moving up, the long futures will try to book profit by selling and hence slowing down the move up, and similarly when market comes down the short futures will try to buy back and slowing down the fall.
The stock price in turn is directly related to futures price, so this ensures that there is resistance when suddenly stock price moves up or down.
This is broadly the logic why there are no circuit for stocks trading in F&O.
-Nithin Kamath (Zerodha C.E.O)

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