Jump the Bid

Indian markets have all sorts of offerings nowadays. Traders who want to buck the tide can trade instruments right from Futures, to options, be it Index or stocks. Although risky instruments to trade, termed so because of the Leverage they use, if used properly these can prove very beneficial. Each year I meet many traders who have given up their day jobs for trading, trading full time! The numbers are increasing at an exponential rate and I am happy to see some of them doing it successfully.

 

Markets are ever evolving and dynamic. Even after the Futures and options segment being introduced more than 12 years ago, we still face some issues. I am going to restrict the scope of this article only to Traders and Trading. The biggest contention a trader has, while choosing a market, is Liquidity. Markets are pretty fast nowadays and Traders want to get in quick and move out fast. Only in the most liquid markets this is possible. Indian markets are liquid and market makers provide liquidity. Let me give an example.

 

 

 

Above is a grab of Bank Nifty ATM call option. One can see there is a difference between the bid price and the ask price. The tick in Indian markets is 5 paisa. So in an ideal case the difference between the latest bid offer and ask should have been only 5 paisa. There is a notable difference above though. Lot size of Bank Nifty is 25, and if a buyer wants to buy, he can put a market order and buy. But if he is doing that he is effectively paying a more price! This is called as “Jumping the Bid”. When a trader feels confident about a trade, he will surely jump the bid. Is it a wise decision to take? Traders often face this dilemma. For a trader who wants to do a quick trade such a decision could cost him dear. Buying higher, adding slippages to it, net- net the breakeven only increases. The first few points trader has to earn, only to provide for the slippages. Slippages are the net outgo in terms of brokerages and taxes. For a trader slippages should be minimum.

 

The advent of discount brokers is a boon for traders. There are two reasons for this. First one that there is a fixed, flat brokerage. Second, as the name itself suggests, it carries a discount. Brokerage charges are applicable on per executed order and not a percentage on total volume, which is the traditional way of charging. It thus enables traders to jump the bid. Take faster quicker decisions.

 

Written by:

Sumeet Jain, CMT

Equity Research Desk

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

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