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B. Venkatesh

THE NSE recently introduced eight bank stocks in the derivatives segment. In this context, queries have been raised about the median quarter sigma, one criterion that SEBI prescribes for this introduction. What is this rule?

The rule requires that the order size (volumes X price) required for a stock price to change by one-fourth of its standard deviation (STD) should be at least Rs 5 lakh. It essentially ensures that stocks on the derivatives list are highly liquid.

Assume the quarter STD for a stock is 2.5 per cent. If there are buyers at Rs 100 and sellers at Rs 101, the average price will be Rs 100.50. The quarter sigma price will hence be Rs 2.5 (Rs 100.50 X 2.5 per cent).

Now, deduct Rs 2.5 from the average price of Rs 100.50 to get the buying price of Rs 98. Similarly, add Rs 2.5 to Rs 100.50 to compute the selling price of Rs 103.

Next, we have to find out the total order size that will move the price to Rs 98 or Rs 103. The order size is based on bid and ask prices and volumes available on the NSE terminal. If 10 lakh shares are required to move the buying price to Rs 98, the quarter sigma order size for buying is Rs 98 lakh (Rs 98 X 10 lakh). A similar exercise is done for the selling price.

This data is captured four times a day for each stock for six months. From this data, the buy and sell median order size is taken. Median is a statistical measure that simply picks the middle item in a data set.

If we have a data set having 11 entries, the sixth entry is the median for that set. The median quarter sigma is the average of the median buying and selling price.

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