Financial Daily from THE HINDU group of publications
Sunday, Aug 01, 2004
Financial Daily from THE HINDU group of publications Sunday, Aug 01, 2004 |
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Investment World
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Derivatives Markets Markets - Derivatives Markets Columns - Simple Economics GTC order and program trading B. Venkatesh
Suppose you buy one Reliance Industries August futures contract at Rs 475. You ask your broker to sell the contract at Rs 490. Remember, your broker has many clients. It will be, hence, difficult for your broker to monitor the price movements and sell Reliance when it touches Rs 490. Your broker will, therefore, place a sell order immediately at Rs 490. Since you are willing to sell the contract at that price on any day, your broker will place a GTC order. This essentially means that your sell order will be carried forward every day till you cancel the order or the contract reaches Rs 490. What is the impact of removing GTC orders? Typically, GTC orders are based on technical indicators. Suppose traders expect Reliance to decline after it touches Rs 500. They may place GTC sell orders at Rs 500 to bet on their view on the stock. When Reliance touches Rs 500, a spate of selling orders will be triggered. That may cause the stock to decline sharply. By the same logic, stock price may move up sharply if spate of GTC buy orders are triggered. Either way, the change in price (volatility) will be very large. Preventing GTC orders may, perhaps, reduce such large price changes. The GTC orders should not be confused with program trading. Such a trading refers to buying or selling a portfolio of stocks. You can, for instance, buy all the stocks in the NSE index through basket trading. The infamous Wall Street crash of 1987 was attributed to program trading, though some research studies have concluded otherwise.
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