BSE to strengthen price reasonability check mechanism

To further strengthen its pre-trade risk management framework in the currency derivative segment, top bourse BSE plans to use a more effective method for price discovery from August 8.
"It is now proposed that if the best bid/offer price is not available or if the spread between best bid and best offer price is too wide, then the system shall compute price reasonability range using theoretical price of that contract as alternate reference price, instead of LTP (Last Trade Price)," BSE said in a circular.
"This theoretical price shall be revised throughout the day at interval of 30 minutes based on the latest available underlying price," it added.

Currently, price reasonability range is dynamically computed using a real-time reference price which is based on best bid/offer prices for each contract.
In case the best bid or offer price is not available or if the spread between best bid and best offer price is too wide, then the system computes PRR using LTP of that contract as the alternate reference price.
The price reasonability check meachanism was introduced in equity derivative segment as well as currency options from January.

In price reasonability check functionality, each new incoming limit order price is validated with a stock exchange defined price reasonability range.

This mechanism measures and helps in reducing potential instances of market abuse and fat-finger errors while also facilitating true price discovery and investor protection.
"...Changes in price reasonability check functionality shall be made live in currency derivatives segment with effect from Monday, August 8, 2016," BSE said.
Besides, a mock trading session would be conducted tomorrow in this regard.
The new method would be implemented for contracts of INR-based currency assets (USD-INR, GBP-INR, EUR-INR and JPY-INR). For Interest Rate derivative contracts, last trade price would continue to be used as the alternate reference price.