Freak Trade : Meaning and Defenition

Freak trades can sometimes make headlines, creating buzz in Stock market due to the huge market fluctuations they cause in just a few seconds. Let's look at Freak Trades using some examples.

What is Freak Trades?

Freak trades are when the price reaches an abnormal level for fractions of a second, and then it returns to its previous level. This error could be caused by manipulations, human mistakes, or technical glitches.

1. Fat Finger trades, which are caused by human error, is one example of freak trades. Like typos in texting typos can also happen in securities markets. These typos can lead to a mistaken trade that causes a freak trade.

This is what it looks like: In Oct 2012, a trader from a brokerage company mixed up the price and volume columns which led to an incorrect sell order for Rs650 crores of Nifty stocks. Within minutes of placing the order, the Nifty plunged 15%.

2. The call option contract for NSE’s main index Nifty (16.450 strike price) expired on August 20, 2021. It rose by approximately 800% from Rs135.8 up to Rs803.05 which caused a Freak trade.

3. According to NSE, September 14th, 2021, futures contracts for HDFC, Bharti Airtel and HDFC Bank, Tata Consultancy Services, (TCS) and Reliance Industries, (RIL), jumped approximately 10% each for a few nanoseconds in early trading.

Futures contracts of HDFC rose to Rs 3,135 at a spot price of Rs 2,850. Similar results were seen in the charts below. TCL futures contracts for September expired soared to Rs 4229.85 despite the spot price of Rs3838.50.

Stop Loss Market Orders triggered by Freak Trade

A Freak trade has a high chance of a Stop Loss Order being triggered. A Stop loss Market order has a greater chance of being executed at prices that are not yet traded.

The above example shows that the strike price for NSE's main index Nifty (16.450 strike price) rose by 800% to Rs135.8-Rs803.5 for August expiry. This caused a Freak Trade. Stop-loss Market orders of Rs120-Rs200 were a huge loss for traders. All stop-losses were triggered and executed at the Last Traded Price.

NSE will no longer accept Stop loss Market (SLM) orders for Index Options or Stock Options contracts due to the high impact costs associated with Freak trades.

To minimize losses in Freak Trade situations, a Stop-loss Limit Order may be a better choice.

Freak trades are often not visible on charting platforms. This is because charts are created by brokers' trading platforms using data from the exchanges. The data usually covers four transactions per second, though it is possible to have more. All trades don't make it onto the chart. Retail investors often get confused by Freak Trades, which can cause Stop Loss Market orders to be executed at a different price than the last traded price.

We hope you found this article helpful in understanding what freak trades and how they trigger Stop Loss Orders.