INTRODUCING NSE'S NEW REVERSAL TRADE CANCELLATION MECHANISM (RTCM) FOR EQUITY DERIVATIVES

The National Stock Exchange of India (NSE) has taken another significant step towards enhancing market integrity and protecting investor interests. Effective January 13, 2024, the Reversal Trade Cancellation Mechanism (RTCM) will be implemented in the Equity Derivatives segment. This initiative is designed to curb abnormal or non-genuine transactions, prevent the creation of artificial volumes, and enhance market integrity, safeguard interest of investors.

What is RTCM?

RTCM aims to identify and cancel reversal trades that meet specific conditions during intraday trading. These are transactions between two parties (identified by their PANs or CP Codes) that are matched in a security/ contract amongst each other and reversed subsequently.

(e.g.: first leg is where PAN “A” is the buyer and PAN “B” is the seller and second leg where PAN “B” is the buyer and PAN “A” is the seller).

This mechanism is introduced to prevent any trades that create artificial volume without legitimate market intent. Such practices can distort price discovery and mislead market participants.

Key Features of RTCM

Here’s a breakdown of the core aspects of the mechanism:

1. Trade Monitoring:

RTCM monitors trades between pairs of PANs (or CP Codes for certain clients) on an intraday basis.

Trades are aggregated into two legs:

First Leg: PAN "A" buys, and PAN "B" sells.

Second Leg: PAN "A" sells, and PAN "B" buys.

2. Cancellation Criteria:

Trades between a pair of PANs are eligible for cancellation if they breach thresholds across the following parameters:

Key Conditions for Trade Cancellation:

A trade will be eligible for cancellation if it meets the following conditions:

a. Combined Traded Quantity:

Combined traded quantity of a pair of PANs for both legs to the extent of reversal, compared with market gross traded quantity in the respective contract on that day till that point in time. “Reversal quantity” is the quantity which is bought and sold within the pair of PANs (i.e. if 500 quantity is bought within the pair of PANs and 600 quantity is sold within the pair of PANs then “Reversal Quantity” will be 500 quantities.)

b. Reversal Ratio:

Reversal Ratio in the respective contract, of the pair of PANs at that point in time (e.g. calculation of reversal ratio = if the first leg cumulative quantity is x and the second leg cumulative quantity is y then reversal ratio is (x/y*100) %

c. Square-Off Difference:

Square off difference of a pair of PANs at that point in time in a respective contract (i.e. difference between “average sell price” and “average buy price” multiplied by “reversal quantity”)

d. Reversal Quantity Proportion:

Reversal quantity (both first and second leg) of a PAN till that point in time in the respective contract compared with total quantity traded by each PAN in the pair of PANs in the respective contract for that day till that point of time.

3. Client Code Modifications:

Client Code Modification during market hours resulting in reversal of trade, shall also be cancelled as a part of RTCM mechanism.

4. Exemptions:

RTCM will not apply during the last 30 minutes of the trading session (3:00 p.m. to 3:30 p.m.).

Applicability and Timings:

• RTCM checks shall be done from 10:30 a.m. to 3:00 p.m.
• Trades executed between 09:15 a.m. and 10:30 a.m. will be accumulated and checked from 10:30 a.m. onwards.
• RTCM will not apply during the last 30 minutes of market hours (3:00 p.m. to 3:30 p.m.).

Scope of Contracts Monitored:

The following contracts will be included under RTCM:

Additional Information:

• Proprietary and non-CP code clients will be identified by PAN.
• CP code clients will be identified by CP code.

Pointers to Know:

The implementation of the Reversal Trade Cancellation Mechanism (RTCM) in the Equity Derivatives segment is set to have a notable impact on traders.

Here's how:

1. Greater Scrutiny of Trading Practices:

RTCM introduces strict intraday monitoring of trades between specific counterparties (identified by PAN or CP codes). Traders engaged in practices that resemble reversal trades may face:

• Trade cancellations: Resulting in lost profits or adjustments to trading strategies.
• Regulatory and Reputational risk: Frequent cancellations could lead to scrutiny by the Regulators and ICICI Securities Limited (I-Sec). I Sec may undertake action as deemed appropriate including withholding of payout/ initiating closure of account.

2. Adjustments in Algorithmic and High-Frequency Trading (HFT):

Algorithmic and high-frequency traders, who execute large volumes of trades within short intervals, must ensure their strategies do not unintentionally mimic reversal patterns. They may need to:

• Reprogram algorithms to align with RTCM conditions.
• Perform pre-trade validations to avoid trades flagged for cancellation.

3. Reduced Market Manipulation:

The RTCM mechanism aims to curb abnormal/ non-genuine trades/ creation of artificial volumes. Clients shall refrain from undertaking such trades.

4. Enhanced Operational Costs:

Traders may need to invest in:

• Compliance systems: To monitor and avoid trades that could violate RTCM rules.
• Training programs: For traders and compliance teams to understand and implement the new framework.

The daily list of contracts subject to RTCM restrictions limits trading flexibility. Traders must:

• Refer to NSE's daily updates to identify contracts under RTCM.
• Ensure necessary safeguards to avoid reversal-like trades to prevent cancellations.

6. Challenges in Intraday Trading:

Since RTCM monitors and cancels trades intraday, traders involved in frequent buying and selling of the same contract between counterparties need to re-evaluate their strategies to avoid:

• Transaction reversals within the same counterparty pair.
• Over-reliance on speculative trades within the monitored timeframe.

7. Transparency and Confidence Boost:

For genuine traders, RTCM enhances market transparency and fairness. By eliminating manipulative practices, it fosters an environment of trust and ensures more accurate price discovery.

Conclusion:

The RTCM mechanism pushes traders towards a more compliant and transparent trading approach. While it may create operational challenges and require strategic adjustments, its implementation ultimately benefits market participants by promoting fairness and integrity in the equity derivatives market. Traders must stay informed, adapt strategies, and leverage technology to align with this evolving regulatory landscape.

Some frequently asked questions (FAQs):

1. What will be the impact on your open positions if your trade comes under RTCM?

Answer: If your trade is identified as a reversal trade, it gets cancelled by exchange automatically and the same will be communicated through an update in your online trading account and email.

• If the square off trade is cancelled under RTCM mechanism it will result in an open position. Your account will be shifted to Square-off mode where you can only square off your existing positions and will not be able to create fresh ones for that particular day.
• If a fresh trade is cancelled under RTCM mechanism it will result in cancellation of your open position.

2. What is the impact on your limits if your trade comes in RTCM?

Answer: Once we get a RTCM confirmation from exchange on your trade, in case of a square off trade being cancelled the limits will be blocked.

3. When can I square off RTCM trades?

Answer: After any trade being detected under RTCM and cancelled by the Exchange, your account will be shifted to Square-off mode for the day such that no new positions are permitted. Post which, your trade gets recreated by EOD and will be visible in your Open Positions. In case you wish to execute square off trade cancelled earlier by the exchange the same can executed on the next day.

4. Why is my account shifted to Square off mode?

Answer: The account shall be moved to Square off mode where you will be only be able to square off your existing positions. The same is been done to prevent margin shortfall.

5. Does RTCM apply for fresh or existing open positions?

Answer: RTCM applies for both fresh or existing open positions.

6. When I will be moved out of square off mode and able to place fresh order?

Answer: If your account is moved to Square Off mode, no fresh orders will be allowed for the day and you can only be able to square off your existing open positions. However, the trade cancelled by Exchange under RTCM gets recreated by EOD and will be visible in your Open positions. You will then be able to place fresh orders.

7. What will happen if my GTT order is cancelled under RTCM?

Answer: If your GTT order is identified under RTCM, Single & OCO GTT request will get cancelled if trigger is breached and you will be notified with remarks: 'Account disabled for taking fresh position. Go to: Outstanding Obligation on Allocate Funds page. Refer My messages for details’

Whereas, Cover OCO GTT gets triggered if open position exists in same contract.

For further details, refer to the NSE circular (NSE/SURV/65645/ NSE/SURV/65736),  or reach out to our experts at ICICI Direct for guidance on navigating these changes effectively.

Stay informed, trade wisely!