A call option on the Sensex with a strike price of Rs 4 surged to Rs 209 within a matter of seconds, prompting SEBI to launch an investigation

 Unusual Sensex Call Option Surge Prompts SEBI Inquiry

      

1. Introduction: The September 8, 2023 Event

On Friday, September 8 (expiry day), the Sensex Call Option of 67,000 strike saw a sudden surge: in under a minute, it jumped from Rs 4.30 to Rs 209.25. This is presumably due to a freak trade, which has caused a lot of heartache and financial losses to some traders. SEBI is learnt to have initiated an inquiry into the matter.

2. The Event Unfolds

Expiry day on Friday (September 8, 2023) saw some high drama on Dalal street. A freak trade, suspected to be an erroneous order input by a trader, resulted in the Sensex Call Options with 67,000 strike jumping nearly 5,000 percent in a matter of seconds — from Rs 4.30, to Rs 209.25. CNBC Awaaz learns that this has prompted market regulator Securities and Exchange Board of India (SEBI) to initiate an inquiry into the matter.

 3. Impact on Traders

The wild swing in the premium of the Option normalised in seconds, but various anguished posts on social media platforms by traders claim that this spike, albeit momentary, resulted in heavy losses. Traders on the other side of the trades, of course, netted significant profits.

User Experiences: A user named Penchala Redday wrote, "very bad....I am facing this issue from 2:30 PM and unable to adjust the orders or add new orders. It get the losses to me."

Mixed Outcomes: While another user Kapilan Thirumavalavan said he got 'free money' because of the glitch. "I just got free money from SENSEX expiry glitch. I'm happy and also sad that people would have lost money as well. I was in 60k loss and suddenly out of nowhere I got 3.5L profit in 2 seconds &market didn't move anywhere... purchased @ 52 and sold @ 209," he said.

 

4. Algo Trading Implications

 This incident, by no means the first of its kind in the derivatives market this month, has traders once again pointing to the potentials and perils of algo trading. On August 11, a few freak trades in the 45,700 Strike Nifty Bank Put Options led to premiums declining by more than 90 percent.

 5. Detailed Timeline of the Event

11:02 AM: The premium of the Option Contract spiked from Rs 4.30 per share to Rs 209.25 per share within a minute.

 11:03 AM: The Option Premium was fixed at Rs 5.45 per share in the very next minute, but not before around 5.49 lakh shares were exchanged.

 6. Potential Causes

One theory is that the trader punched in market orders instead of limit orders. In case of buy trades, a limit order would not buy above the limit set; however, if a market order is placed, the trade would be executed at every price range allowed by the prevailing depth in the market, till the order is fully filled. This is an issue in illiquid options like the Sensex 67,000 Calls. Most brokers do not allow market orders for illiquid options, and some believe this is also an area where the broker might have erred.

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