Securities In Ban For Trade Meaning & When Does It Apply?

Securities In Ban For Trade Meaning & When Does It Apply?

Securities in ban for trade meaning: The F&O is a highly volatile segment in the stock market where individuals come to trade with the intention of earning high amounts of profits or hedging their funds.

But due to the nature of its volatility, not all the stocks can be traded in the F&O segment. The stocks need to complete certain criteria to be included in this segment.

And even after their inclusion, they are subject to strict oversight and regulations by the stock exchange. If the stocks fail to fulfill the rules, the stocks can be removed from the F&O segment, and also sometimes the stock will come under an F&O ban.

In this article, we going to discuss the eligibility criteria for stock selection for the F&O segment and also cover securities in ban for trade meaning.

Eligibility Criteria For Stock Selection For The F&O Segment 

The stock selection criteria for trading derivatives in India make sure that the stock is large in terms of market capitalization, and turnover, has enough liquidity in the underlying market, and that there are no adverse issues connected to market manipulation.

In order for the stock to be introduced to option and single stock futures contracts should  conform to the following broad eligibility criteria for a continuous period of six months:

  • The stock shall be selected from among the top 500 stocks in terms of average daily market capitalization and average daily traded value in the past six months on a rolling basis.
  • The stock’s median quarter-sigma order size (MQSOS) shall not be less than Rs 25 Lakhs over the last six months on a rolling basis
  • The Market Wide Position Limit (MWPL) in the stock should be more than Rs 500

crores on a rolling basis,

  • The average daily delivery value in the cash market in the past six months shall not be less than Rs 10 crores on a rolling basis.

If a stock trading in the derivatives segment fails to fulfill the above criteria for three continuous months, then a fresh month contract will not be issued on that security.

However, the already existing unexpired contracts may be allowed to trade till expiry and also new strikes may also be introduced in the existing contract months.

A stock can be eligible to be included in the F&O segment again after the exclusion, provided the stock fulfills the enhanced eligibility criteria for six consecutive months.

Securities In Ban For Trade Meaning

When it is believed that a particular stock is trading in the F&O segment poses a risk to the integrity of trades and puts traders at risk, the trading for the particular stock is halted in the F&O segment. This is the securities in ban for trade meaning.

The traders will not be able to take any new positions in the derivative segment for the particular stock until the stock ban is lifted.

To combat a stock’s excessive spike and speculative trading, it will be added to the F&O ban list. The stock exchange only permits traders to close out their positions while trading that particular stock on the derivatives market.

A penalty of 1% will be imposed on the value of the increase in the fresh positions taken by individuals on securities that are under the F&O ban list.

It should be noted that while the security is on the ban for trading in the derivative segment, individuals will be allowed to buy and sell the securities in the cash segment.

When Does The Stock Enter The F&O Ban?

The open interest of stock trading under the F&O segment should not exceed 95% of its  Market Wide Position Limit (MWPL). When the security crosses 95% of its MWPL, it will be included in the F&O ban list.

Until the open is reduced to 80% of the MWPL, the stock will remain on the F&O ban list. Individuals will be able to open fresh positions in the stock once the number of open positions has decreased to the predetermined limit.

What Is Market Wide Position Limit (MWPL)?

The maximum number of open positions that are allowed on futures and options contracts of the particular underlying stock is known as the Market Wide Position Limit.

How Is It Calculated?

The daily average price (MWPL) should be less than 30 times the daily average volume of shares traded in the relevant underlying securities for the preceding calendar month or 20% of the number of shares held by non-promoters in the relevant underlying security, or free float holding. 

For instance, if the equity base of a company consists of 100000 shares, of which 40%(40000 shares) is held by the non-promoters, the MWPL will be 8000 shares which are 20% of 40000 shares.

Is The F&O Ban Applied To Indices?

It is important to keep in mind that the F&O restrictions only apply to equities, not to market indices. Individuals who trade in indices are not subject to the effects of F&O prohibitions.

Also Read: What Is The Impact of F&O Ban On Share Price?

In Closing

In this article, we discussed the Eligibility criteria for stock selection for the F&O segment, Securities in ban for trade meaning, conditions where stock enters F&O ban, and the meaning of MWPL

Despite the possibility that this discussion of the F&O ban projected a bad outcome for futures and options trading, it also can be advantageous for traders.

For instance, upon a stock being added to the ban list, the price of the stock may continue to decline; however, traders frequently notice a comeback in the price of the shares after the stock is taken off the ban list.

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