What is Freak Trade in Stock Market?

If you follow the stock market news, you must have heard the headline that there is market fluctuation and disruption in the market conditions. All these happen instantly but affect the trader’s revenue profoundly. Now, you may want to know what are freak trades? What is freak trade in the stock market exactly? 

A freak trade is an instant trade error that results in a sizable tidal rise in the stock price, and then the price goes back to the previous stock price level.  This error can be a human mistake, manipulation, or sometimes a technical glitch.

There are some significant reasons in the stock world for the freak trade to occur; those are Algos placing continuous orders because of malfunction. The fat finger trades, the Possibility of stop-loss market order triggering at a definite time, and sometimes due to an imbalance in the supply and demand chain.

To understand the freak trade meaning in a better way, we must look at a good example showing us a clear view of these types of trades.

Explain the Fat Finger Trades

A fat finger is one instant for the freak trade to occur. A typo error happens with traders when adding an order turns into a large order. This error in the trade process is known as The fat finger trade.

You can consider an example of a brokerage company in 2012, a trader at that brokerage firm mixed up the volume and price column for which trade resulted in the selling order of Rs.650 Crores worth of Nifty Stocks. These stock trades result in a panic situation. They drop about  15% in the nifty, which occurs in a minute of the order placement.

Another example of fat finger trades is when a trader buys 600 quantities of Nifty 16450 CE but mistakenly bought about 6000 quantities by a simple typing mistake.

The exchange has a quantity freeze rule for no chaos, which regulates the order according to quantity. It helps avoid dangerous mistakes that can harm the stock market condition.

On August 2, 2021, the stock exchange introduced a single order freeze quantity for Nifty, Banknifty, and Finnifty with an order of 2800, 1200, and 2800, respectively.  If any order goes above this limit, the NSE will automatically cancel the order, safeguard the trader, and protect the stock market balance. 

The Trade Execution Range (TER) is the price range set by an exchange as a risk assurance tool to ensure that no order gets executed beyond a certain price level. Due to these changes of TER removal, we still get to know what is freak trade and how it can affect the stock market?

Freak Trade and Trigger in Stop Loss Market Orders

The smart solution is to stop the loss of the limit order. The stop-loss limit order is different from the stop-loss order in that we get an option of stop price that will convert the order to a sell order and the limit price. So the difference is clear as making a market order to sell, the sell order will become a limit order and execute only at the limit price.

You need to use a higher limit order than the market order. For example, when you buy or sell stock or contract, you need to use the limit order and place a higher limit order than the LTP or touchline.

Example

Let us take an example of Nifty 1640 CE, in Which LTP or Last Traded Price is Rs 199. 

You can place a limit order at Rs.199, which will be the same as LTP. First, you need to check the best seller. The best seller will be at Rs 200 and the best buyer at Rs 199  in the stock market. So you can place the limit order at Rs 200, so your order gets filled at 200 or a better price. But sometimes prices move very fast. So what if the price goes to a higher market price at 3-4 % higher than best sellers. Suppose the best seller at Rs 200 will place a  limit order at Rs.203. Sometimes there might be a considerable gap between the best buyer and best seller. It’s better to avoid these types of stocks.

Another thing to know is when you place a stop-loss order; you should use the SL-L order type; in these, you will get a trigger price and the limit price, and once your order gets triggered, your order will get converted as a limit order.

For example: Consider that your order is Nifty 1650 CE at Rs.200, and the stop loss will be at Rs.180. So you had defined a trigger price of 180, and the limit price will be Rs.178. Therefore when the price reaches Rs180. So your order gets triggered and sent to the exchange as the limit order you set is Rs178. 

But sometimes, there will be a chance of freak trade when the price suddenly falls below Rs. 178. In this situation, your sell order may not work. For minimized risk, there is one trick that you can follow that is to keep a higher gap between the trigger and limit prior example, suppose your trigger price is Rs180. Then the limit price will be Rs 170. Once the order gets triggered, the trade will get executed at the best price and decrease the chance of error.

Conclusion

So now you come to know, What is freak trade in the stock market. And the solution to handle a freak trade. That is the stop-loss limit order. There are scenarios where the freak trades do not appear in the charting platform. It happens because the broker trading platform receives the data from the exchange, and there is a delay of around four trades per second. So the actual number of transactions is more per second than you know. So the retail investor got stuck between these trades as the stop loss market order gets far from the last traded price.

But the market regulators are trying hard to avoid these types of manipulation and illiquid derivative contracts on the stock exchange.

Frequently Asked Questions (FAQs)