Limit Price Protection (LPP) on Trading in Index Options

1

Hi Everyone

Recently the NSE has come up with the circular dated 28/10/2022 for pre-trade risk controls. NSE has applied a new mechanism of Limit Price Protection (LPP) on Index Options. This is to make sure an effective risk management framework is in place and to achieve fair price discovery in the market.

What is Limit Price Protection?

Limit Price Protection or LPP is the mechanism to define the price range for the Limit Orders if these order types are placed out of that range they will be rejected.

What LPP mechanism exchange has been applied in the latest circular?

The LPP range in the above-mentioned circular is applied only to the index options. The range is applied with respect to the Last Traded Price or reference price as defined in the circular.

  • For Options Premium less than ₹50, the LPP range is ±₹20 from LTP/reference price (absolute ₹20, not percentage)
  • For Options Premium more than ₹50, the LPP range is ±40% from LTP/reference price.

What happens if one places an order out of the LPP range?

Any Limit Order placed beyond the LPP range shall automatically be rejected by the Exchange as per the following condition:

  • Buy limit order price > High LPP limit
  • Sell limit order price < Low LPP limit

The important point to note here is that the same LPP range is also applicable on the Stop Loss Limit order post-trigger. Hence, when SL-Limit is triggered and a limit order is placed, the same LPP checks will be applicable.

Lets review with some Examples:

Suppose the index option is trading at ₹100, since the premium is more than 50, the LPP range will be ±40% from the LTP i.e. upper limit of ₹140 and a lower limit of ₹60.

So if you place a buy limit order above ₹140, your order will be rejected, similarly, if you place a sell limit order below ₹60, your order will be rejected.

The same applies to the SL-Limit order, since the LPP check is applied post-trigger on SL-L, the system will allow you to place order out of LPP range, but will not execute post-trigger.

But you are open to place buy limit order below the lower limit of LPP and sell limit order above the upper limit.

Similarly, if the index option is trading at ₹30, since the premium is less than 50, the LPP range will be ±₹20 from the LTP i.e. upper limit of ₹50 and lower limit of ₹10.

And if the limit order and SL-limit (post trigger) are placed out of this range, it will be rejected.

Hope this clarifies Limit Price Protection and risk management around. With this, we are also working on Market Price Protection (MPP) for Options Trading, a detailed post on it later.

Till then Happy Trading on Dhan!

Best Regards
Kuldeep Mathur (Risk Team)

4 Likes
How to place SL and Target for options
2

If LTP is 100, how can be BUY LIMIT ORDER above 100?

3

Context is for Short / Long positions

4

Can you please elaborate?

5

Hi @amit

This protection is to avoid distortion in price discovery. Traders often place limit order in open depth, which eventually works as a market order only. And market order has its own protection called Market Price Protection(MPP).

Also you must be aware that exchange do not allow SL-M in options (without MPP), so market participants were using SL-L as SL-M (keeping limit price far away from trigger price). Hence to have a better risk controls over these points, regulators have come up with these protections.

So the example quoted above, where limit order is placed above LTP, will eventually play as a market order and to have a fair price discovery or to avoid freak trades, this mechanism of LPP is in the effect.

1 Like
6

Can someone at Dhan please explain to me how a market order can fail due to lpp issue

1000313486

7

@kuldeep @Dhan pls

8

Question is open, Answer would be appreciated :folded_hands:

9

Hi @t7support,

Sorry for the delayed response.

We are reviewing your query and will get back to you with the details shortly.

While we’re always happy to help here in the community, we recommend contacting our support team if you need a faster resolution.

10

Hi,

Your market order was placed at 9:15 AM. As per the exchange’s Lower Price Protection (LPP) mechanism, market orders are subject to the applicable price protection limit. In this case, the 20% limit was calculated based on the previous closing price of ₹76.70, resulting in an LPP price of ₹92.04.

11

As per exchange LPP won’t be applicable for market orders as it has no limit price.

1000314762

When support is helpful I will definitely contact support.

12

Hi @t7support

You placed a Market Order in the first minute of the Market Open. During this time MPP (Market Price Protection is applied. If the price breaches MPP range, we convert the order to limit & exchange applies its LPP. Since, the unmatched market order was changed to limit order, Limit Price Protection (LPP) is applied.

PS : The rejection is from the exchange. There is hardly any control of broker.

13

Ok. Thanks @Naman @Sameet. That explains it.