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Wednesday, 13 January 2016 14:09

India: Bombay Stock Exchange to begin price reasonability check in equity derivatives

India: Bombay Stock Exchange to begin price reasonability check in equity derivatives

To strengthen its pre-trade risk management framework, top bourse Bombay Stock Exchange (BSE) has decided to introduce price reasonability check (PRC) for equity derivative segment as well as currency options from January 18.

According to Press Trust of India, the mechanism is on the lines of globally prevalent risk management measures and helps to reduce potential instances of market abuse and fat-finger errors while also facilitating true price discovery and investor protection.

"The exchange proposes to introduce PRC functionality in equity derivatives segment as a measure to further strengthen the exchange's pre-trade risk management framework," BSE said in a circular on Wednesday.

Besides, the exchange in a separate circular said it will implement the mechanism for currency options products. It had introduced PRC for the currency segment in 2014.

The PRC functionality would be made live "from Monday, January 18, 2016".

In PRC functionality, each new incoming limit order price is validated with a stock exchange defined 'price reasonability range (PRR).'

"PRR shall be dynamically computed and applied by the trading system using a real-time reference price. This shall ensure that the price of an incoming limit order is not too far off from the prevailing market prices," BSE said.

PRC is applicable to incoming limit orders and the price of these orders is checked with respect to PRR prevailing at that point of time.

"Trading system automatically switches, in real-time, between using the best bid/offer price and previous close price as the reference price to compute PRR, depending upon the order book situation," BSE said.

According to BSE, PRC would be applicable for all futures and option contracts of equity derivatives segment.

BSE said it may relax the applicable PRR and order price slabs depending on prevalent market conditions.

To familiarise members with working of PRC, BSE has asked the stock brokers to test it in simulation environment.

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