If you are worried about getting trapped in freak trades and losing millions in no time, then this article is for you. I am going to answer What is Freak Trade-in Zerodha , Why Freak Trades are happening frequently and How to save ourselves from this freak trade in NIFTY & Freak Trade-in BANKNIFTY.
Many traders have suffered the huge losses caused by this freak trade and all of a sudden there is a spike in the number of freak trades. Before I tell you why it is happening, let me explain what this FREAK-TRADE is all about.
FREAK-TRADE is in simple words is an event where price trades at an abnormal level for a fraction of seconds and come back to the normal price level. For example, Assume a trader placed a BUY SLM (BUY Stop Loss Market ) Order @200, Instead of he getting a price @200 he gets it at 1000 or even more! This is called a FREAK-TRADE and it results in huge loss which brokers call an IMPACT COST.
Now you may be wondering, Can this really happens to me or is it really happening? Well, The answer is YES. If you don't take appropriate actions and change your present approach you can end up with huge losses which are most painful to accept.
Markets are always dynamic and there are so many things that are happening in the name of SAVING RETAILERS. One such event was removing the INTRADAY MARGIN and after digesting this, all of a sudden the FREAK trades issue. So it makes ZERO sense to blame anyone at any point in time because no one is going to take the responsibility here except you (trader)! Hence rather than blaming let's focus on the solution part.
Now it's time to understand the reasons behind FREAK-TRADES.
There are three important reasons behind it,
LACK OF LIQUIDITY.
OPTIONS FREEZE LIMIT REMOVAL.
Using MARKET ORDERS.
let's understand them in detail,
LACK OF LIQUIDITY:
If you are trading NIFTY & BANKNIFTY by thinking they have good liquidity in the FNO segment, it's NOT. Yes, the most famous INDICES options have liquidity issues. The recent article of Nithin Kamath (Founder of ZERODHA) clearly states that the present turnover that is shown and displayed in media is a notional value but in reality, the daily turnover is around 40,000 Crores (Both in FUTURE & OPTIONS SEGMENT).
So, the above Image of the ZERODHA Article clearly shows us that our markets have a shallow depth and there is a high possibility of getting huge impact costs simply because there are not enough opposite orders.
It is the first reason for FREAKTRADES.
But wait, Even earlier also FREAK trades were happening, all of a sudden the number of events or frequency of this kind of trades is increasing. There comes the second reason which is REMOVAL OF FREEZ LIMIT in OPTIONS by Exchange.
REMOVAL OF FREEZ LIMIT:
Most people are assuming that freak trades are increasing due to the removal of INTRADAY MARGIN, but the main reason is EXCHANGE has removed the OPTIONS FREEZ LIMIT completely from 16th Aug 2021. What is this freeze limit? It was a limit set by the exchange to avoid freak trades so at any point the market orders that were supposed to be executed beyond a certain range of options, the order was getting rejected. This mechanism was automatically imposed by the exchange for all options contracts.
But for what good reason I still don't know, this FREEZE LIMIT was removed by exchange and this is the primary reason why freak trades numbers are increasing day by day. Literally, options prices can be traded at any price level even though there is a circuit limit (Useless Circuit limit).
Now, the third important reason is using SLM or Market orders for execution.
Using MARKET Orders:
This is the most important reason why freak trade can happen to you. If you are using MARKET ORDERS in any sense, it may be SLM or direct MARKET Orders, then it's time to change your approach.
You need to understand what is the meaning of the orders that you are placing. Every type of order has its own purpose and it's the communication you have with your broker. For example, When you are placing a MARKET order, that means, you are ready to accept any price but you want the order to be executed at any cost. Wherein when you use a LIMIT order you are ready to accept the order only within the mentioned limit but not beyond your limit price mentioned in the order.
When you use, MARKET ORDER the EXECUTION is Assured but the PRICE is not assured. With LIMIT order PRICE is assured, but not the EXECUTION. So when you are placing a MARKET order be it an SLM or Direct order, You are openly ready to accept any price. Hence there is a high chance of exposure to FREAKTRADES with these orders.
It's crystal clear that using SLM or Direct MARKET order is a BIG NO!
I believe you have a reason behind why this freaky thing is happening. Now comes the next essential question, What can be done so that we trade safely without facing FREAK TRADE?
Here is a solution part,
There are two different situations here, one is ENTRY and EXIT.
Solution for Entry :
As I have mentioned earlier, using MARKET ORDER has to be eliminated. But if you want to enter the market without any delay, you can use LIMIT order instead of MARKET order with a higher buffer value to the LTP.
Let's understand it by an example,
Assume you want to enter a BUY order in 36600CE at the market, So here instead of placing direct BUY Market order, you can place a BUY LIMIT Order with a higher value than the present LTP. In this example, it's trading around 357 and you can place a LIMIT BUY with a limit price of 400. By doing this, you are communicating with the broker to execute your BUY order within 400 and the present price is below 400 and hence the order will be executed immediately as a market order but within the 400 Rs only. Suppose at that time FREAK trade takes place, even in that case you are only liable to get the price within the mentioned limit which is 400. refer to the below image.
Let's take an example of SHORT entry of the same option contract. Instead of placing direct sell Market Order, We place a SELL LIMIT order with lower prices than LTP. For example, you are placing a SELL LIMIT ORDER at 300, when you do so, you are assured to get the price within this limit. Observe the below Image.