Avoid outsized positions and high leverage to soften blow of trading outage

Losses caused by technical glitches can get magnified due to leverage, hence retail investors who do day trading need to be cautious

The connectivity glitch that led to a prolonged stoppage of trading on the National Stock Exchange (NSE) on Wednesday left many day traders shaken. For many who have begun trading over the past one year, the situation was novel and nightmarish. Experts say such glitches do not happen normally, but investors should not presume they can never happen.

When such glitches happen, an investor can suffer losses because he does not have the option to exit his position if the market moves against him. His losses can get exacerbated if there is a large movement in the market on that day. “You may have put in a stop loss, but it will not get executed. When the market reopens, the pending orders are cancelled. You will have to put in fresh orders based on the prices at that time,” said Vikas Singhania, executive director, Trade Smart Online.

Let us explain this with a hypothetical example. Let's suppose that the Nifty was at 14,750. You made purchases and also put in a stop loss order to square off your positions if it goes down to say, 14,700. Due to the technical glitch the stop loss order gets cancelled. And when the market reopens, the Nifty is at 14,500. If you square off your order at reopening, you will have to do so at this price. So, you will suffer a loss of Rs 250 because of the glitch.

Similarly, if the market moves up, short-sellers suffer. Losses tend to be limited in the cash segment. They get magnified in the futures and options (F&O) segment due to leveraging.

No insurance cover is available against such situations. Your only safeguard is to take prudent-sized positions. “Retail investors who do day trading, especially, should take positions according to their financial capacity. They should also use limited amount of leverage,” said Singhania. Being a long-term investor also helps as they remain unaffected by such glitches.

Whenever such events occur, watch out for communication from your broker. “We have sent an SMS to our clients saying we will start squaring off positions from 3 PM on the BSE if the NSE fails to reopen by then,” said Shrey Jain, founder, SAS Online, a Delhi-based discount broking firm. If you don’t want your broker to square off your positions, respond at once.