Trading Mechanism: formula sheet

Key formulas

Order matching rule

Priority = best price first, then earliest time

Higher bids and lower offers get priority. At equal price, the earlier order is matched first.

Trading member (TM)

TM = can trade, cannot clear on its own

It must be linked to a clearing member for settlement.

Clearing member (CM)

CM = clears and settles trades

It takes responsibility for the trades of the trading members attached to it.

Trading-cum-clearing member (TCM)

TCM = trades + clears

It clears its own trades and may also clear for other trading members, as the clearing arrangements permit.

Professional clearing member (PCM)

PCM = clears only, never trades

It clears for trading members and custodial participants but does not do proprietary or client trading.

Workflow

Client → TM → NEAT F&O match → trade → clearing corporation → CM → settlement

Use it to place any entity in its correct step.

Limit order rule

Buy: execute at limit price or lower | Sell: execute at limit price or higher

Gives price control but no guarantee of execution.

Market order rule

Executes immediately at best available price

Gives execution certainty but no price certainty.

Stop-loss trigger position

Sell SL: trigger below market | Buy SL: trigger above market

The order is dormant until the trigger price is reached.

IOC rule

Execute immediately (fully or partly); cancel the balance

Partial fills are allowed; the unfilled part is cancelled.

Price-time priority

Better price first; same price → earlier time first

Best buy = highest bid. Best sell = lowest offer.

Contract value (notional value)

Contract value = Price of underlying (or futures price) × Lot size × Number of lots

Use the futures price for futures. For options, notional value uses the strike or underlying price, but premium paid is different.

Option premium payable

Premium payable = Premium per unit × Lot size × Number of lots

Paid by the buyer. The seller receives it and pays margin.

Value of one tick

Tick value = Tick size × Lot size

Tick size is ₹0.05 for index and stock futures and options on NSE.

Profit or loss on futures

Long: (Exit price − Entry price) × Lot size × Lots. Short: (Entry price − Exit price) × Lot size × Lots

Ignore charges and taxes unless asked.

Trading quantity rule

Quantity traded = Number of lots × Lot size

Orders are in multiples of the lot. Partial lots are not allowed.

Stock size test

Top 500 by average daily market capitalisation AND average daily traded value (previous 6 months, rolling)

Both rankings count, not just one.

Order size test

Median quarter-sigma order size ≥ ₹75 lakh (current, SEBI's 2024 revision); ₹25 lakh (earlier figure)

Measures how large an order moves the price by a quarter of a standard deviation. It is a liquidity test, taken as a median over the previous six months.

MWPL test

Market-wide position limit ≥ ₹1,500 crore (current, 2024 revision); ₹500 crore (earlier figure)

Tests the room available for open positions in the stock.

Delivery value test

Median daily delivery value in cash market over the previous 6 months ≥ ₹35 crore (current, 2024 revision); ₹10 crore (earlier figure)

A liquidity test on actual delivery-based trading in the cash market.

Index eligibility

Cumulative weight of constituents that are eligible for derivatives ≥ 80%, counting only constituents with weight ≥ 0.5%

One test with a counting rule. Eligible stocks below 0.5% are not counted toward the 80%, but they do not disqualify the index. Ineligible stocks add nothing to the 80%.

Continuation rule

Fails criteria for 3 consecutive months → no fresh month contracts

Existing contracts continue and further strikes can be added in them. Fresh contracts can be introduced once the stock again meets the criteria.

Turnover for futures

Turnover = Price × Lot size × Number of lots

Transaction charges and STT on futures are based on traded value.

Turnover for options (premium)

Premium turnover = Premium × Lot size × Number of lots

Exchange transaction charges on options are levied on premium value, not on the strike value.

Charge on turnover

Charge = Turnover × Rate ÷ 100

Use the rate given in the question. Do not use rates from memory.

GST base

GST = GST rate × (Brokerage + Exchange transaction charges + SEBI turnover fee + any other service charges)

GST is not charged on STT or stamp duty.

Contract note timing

Contract note issued within 24 hours of trade execution

Issued by the broker to the client. It generally carries the client code and the broker's registration details.

STT side

Futures: STT on sell side; Options: STT on sell side premium; Exercise of in-the-money option: STT on buyer, on settlement (intrinsic) value

Buyers pay no STT on buying futures or on purchasing an option. The buyer pays STT only when an in-the-money option is exercised.

Quick revision

• NISM-Series-VIII: 100 questions, 100 marks, 2 hours, pass 60%, negative marking of 25% of the marks assigned to a question.
• Orders are matched on the exchange's screen-based system by price priority first, then time priority.
• A limit order fixes the price you will accept; a market order fixes execution and takes the available price.
• A stop-loss order is activated only when the trigger price is reached.
• IOC (Immediate or Cancel) executes whatever it can at once and cancels the unmatched part.
• A Day order stays valid only until the end of that trading day if not executed.
• Contract value = price × market lot; lot size is set by the exchange.
• Only underlyings meeting the exchange's eligibility criteria can have derivatives contracts.
• Limits apply at several levels: client, trading member and market-wide. Learn who each covers.
• A contract note is the trade record issued by the trading member to the client. Learn its timeline from the workbook.
• Brokerage and other charges are cost items. Know which are statutory and which are the broker's.

Common mistakes

• Thinking a professional clearing member can also trade. Fix: Remember PCM = clearing only. If an option says PCM trades for clients, reject it.
• Saying the trading member settles trades with the exchange directly. Fix: Settlement goes through a clearing member to the clearing corporation. A TM that is not a CM depends on a CM.
• Thinking a limit order always executes Fix: Remember: limit gives price control, not execution certainty.
• Saying an IOC order must be filled in full Fix: IOC allows partial execution. Only the unexecuted balance is cancelled.
• Using a remembered lot size instead of the one in the question Fix: Treat the question's data as the truth. Learn the concept, not the number.
• Confusing lot size with tick size Fix: Lot size is minimum quantity. Tick size is minimum price movement.
• Mixing up lakh and crore between the order size test and the MWPL test Fix: Remember order size is in lakh, while MWPL and delivery value are in crore.
• Treating the 0.5% rule as a requirement that every eligible stock must meet, or counting all eligible stocks toward the 80% Fix: There is one 80% test. Only eligible constituents with weight of at least 0.5% count toward it. An eligible stock below 0.5% is not a failure. It is just left out of the total. Ineligible stocks add nothing.
• Applying option charges on strike price × lot instead of premium × lot. Fix: For options, the base is premium. Use strike value only when the question is about exercise.
• Charging STT on both buyer and seller. Fix: Remember STT in futures and options sale is on the sell side. Buyers do not pay it on buying futures or purchasing options. The exception is exercise of an in-the-money option, where the buyer pays STT on the settlement value.

Exam tips

• Expect direct definition questions on TM, CM, TCM and PCM. Learn each in one line.
• Watch for the word 'only' in options. It usually points to a PCM or to a wrong answer.
• Price-time priority questions are often small scenarios. Rank by price first, then by time.
• Remember the system is anonymous, order-driven and screen-based. Reject any option that says otherwise.
• On NISM-Series-VIII, a wrong answer carries negative marking of 25% of the marks for the question, so skip only if you cannot cut options down.
• Expect definition MCQs that swap IOC and Day. Read the validity wording carefully.
• In price-time priority questions, rank by price first and use time only for ties.
• Check the direction in stop-loss questions: sell triggers below market, buy triggers above.