Price band
Also written Price band (circuit filter) · Operating range · Price limit circuit filter · Circuit filter · Price limit
The highest and lowest price at which a contract may trade on a given day, set as a percentage of its base price to block erroneous and manipulative orders.
In plain language
A price band is a fence around the day's trading. Orders outside it are simply not accepted.
Its purpose is not to stop the market moving. It is to stop the market moving for the wrong reason — a mistyped order, a fat finger, a thin book pushed around by a single participant. SEBI requires exchanges to operate one "with the view to ensure orderly trading and market integrity".
The band is measured from the base price, which is the theoretical futures price on the day a contract is introduced and the previous day's daily settlement price on every day after that. Where a contract has no real band, the exchange still sets a dummy operating range so that nonsense prices cannot be entered, and relaxes it in the direction the market is moving.
How it works
Each ETIRD contract has its own band, and the differences are examinable.
| Contract | Price band |
|---|---|
| GOI bond futures | ±3% of base price. If a trade prints at the top or bottom of the band, the exchange may widen it by 0.5% in that direction after 30 minutes, having regard to the market trend. Maximum 2 relaxations a day, so the price can move ±4% of base price over the day. |
| 91-day T-bill futures | Operating range of ±1% of base price |
| Overnight MIBOR futures | Operating range of ±5% of the base rate |
| Corporate Bond Index futures | Initial band 5% of previous closing price or base price; expandable 0.5% in that direction after 30 minutes; no more than 2 expansions within a day |
| GOI bond options | No flat percentage. The range is delta-based — computed from the previous close of the underlying and volatility, subject to a minimum operating range applicable to all contracts, recomputed daily and applied from the next trading day, and flexed intra-day if the traded price crosses a set percentage of the range. |
For the MIBOR contract the base rate on day one is the MIBOR OIS rate for the corresponding tenure; on later days it is the daily settlement rate.
The formula
Upper limit = Base price × (1 + band%)
Lower limit = Base price × (1 − band%)
GOI bond futures, after both relaxations:
Base price × (1 ± 0.04) [3% + 0.5% + 0.5%]
A worked example
GOI bond futures. The contract closed yesterday at a daily settlement price of Rs 99.95, which is today's base price. The ±3% band is
99.95 × 1.03 = Rs 102.9485 (upper)
99.95 × 0.97 = Rs 96.9515 (lower)
Orders outside those two prices are rejected outright — and since the tick is Rs 0.0025, the tradable prices run in 25-paise-per-hundred steps inside the fence.
A policy surprise drives the contract to the lower limit at 10:30 a.m. Thirty minutes later, having read the market trend, the exchange widens the band by 0.5% downward:
99.95 × 0.965 = Rs 96.4518
It may do this once more, and no more. The floor for the day is therefore
99.95 × 0.96 = Rs 95.9520
A Rs 4.00 per 100 move, which on a 250-lot position is 4.00 × 250 × 2,000 = Rs 20,00,000 — the most the band will let the position move in a single session.
Overnight MIBOR futures, which are quoted as a rate. Base rate 5. The operating range is ±5% of the rate:
5 × 1.05 = 5.25 5 × 0.95 = 4.75
Not 5.05 and 4.95. The workbook asks this one directly, and it is designed to catch the reader who reads "5%" as "5 basis points".
Why NISM asks about it
Chapter 6, section 6.5 (Price Limit Circuit Filter), carries the full table above; the same figures repeat inside each contract specification in Chapters 3 and 4. Chapter 10 lists price bands among the contract terms a trading member must explain to a client.
The questions are arithmetic and recall: given a base price or base rate, state the operating range; how many relaxations are permitted and after how long; which contract carries which band; and what the band is based on for options.
Common exam traps
- ±5% on MIBOR futures is five per cent of the rate, not five basis points. A base rate of 5 gives 4.75 and 5.25.
- The band is a percentage of the base price, not of the last traded price. Corporate Bond Index futures are the exception, taking the previous closing price or base price.
- Base price changes daily. It is the theoretical futures price only on the day the contract is introduced; after that it is the daily settlement price computed by the clearing corporation.
- Two relaxations, 0.5% each, one direction, after 30 minutes. GOI bond futures therefore reach ±4%, not ±3.5% and not ±6%.
- Options do not get a flat percentage band. Theirs is delta-based, computed daily from the previous close of the underlying and volatility, with a minimum operating range.
- A price band is not a position limit and not a margin. It constrains the price of an order, not the size of a book or the collateral behind it.
- A relaxed band is relaxed in the direction of the move only — the opposite side of the fence stays where it was.
Check yourself
1.The futures discount yield on 91-day T-Bill futures is 6%. What is the quoted futures price, and what price band applies?
- a)106.0000; +/-3% of base price
- b)94.0000; +/-3% of base price
- c)94.0000; +/-1% of base price
- d)98.5000; +/-1% of base price
Show the answer
Answer: (c) 94.0000; +/-1% of base price
Quotation for 91-day T-Bill futures is "100 minus futures discount yield (y). For example, if the discount yield is 5%, then the price of T-bill futures will be: 100 – 5 = 95.0000." So at 6% the price is 100 − 6 = 94.0000. The price band is "+/- 1% of Base Price."
Why the others are wrong:
- 106.0000 adds the yield instead of subtracting it. A higher yield must mean a lower futures price.
- +/-3% is the band for GOI single bond futures, not T-Bill futures.
- 98.5000 is 100 − 0.25 × 6. That is the bracket in the contract value formula 2000 × (100 − 0.25 × y). It is not the quoted price.
2.What is the purpose of a "quantity freeze" limit set by a stock exchange?
- a)To cap the number of contracts that can be traded in a single order, maintaining market stability and reducing "fat finger" errors
- b)To cap the total number of contracts a member may hold across the whole trading day
- c)To freeze trading in a contract once the daily price band has been breached twice
- d)To restrict the number of lots a retail client may hold until margins are met
Show the answer
Answer: (a) To cap the number of contracts that can be traded in a single order, maintaining market stability and reducing "fat finger" errors
"Quantity freeze limits are the maximum number of derivatives (options or futures) contracts/lots for an index that can be traded in a SINGLE ORDER. These limits are set by stock exchanges, to maintain market stability by preventing large, unintended orders that could distort prices, and to reduce the chance of 'fat finger' errors."
The key word is single order — it is not a position limit across the day, which is a separate risk-management concept. Option (c) confuses it with the price band, which for GOI bond futures is +/− 3% of base price and may be relaxed only 2 times during the day.
3.What is the base price of an interest rate futures contract on the first day of its trading, and on subsequent days?
- a)The theoretical futures price on the first day; the daily settlement price computed by the Clearing Corporation thereafter
- b)The daily settlement price on the first day; the theoretical futures price thereafter
- c)The spot price of the underlying on both the first day and subsequent days
- d)The final settlement price of the previous month's contract on both the first day and subsequent days
Show the answer
Answer: (a) The theoretical futures price on the first day; the daily settlement price computed by the Clearing Corporation thereafter
"Base price generally acts as reference price for trading for start of the day. Generally, on the first day of trading (i.e., on introduction) of contract, it would be the theoretical futures price. The base price of the contracts on subsequent trading days would be the daily settlement price of the futures contracts as computed by Clearing Corporation."
The logic is simple: on day one there is no trading history to draw a settlement price from, so a theoretical price must serve as the anchor. This matters practically because the price band is expressed as a percentage of the base price — 3% for GOI bond futures, 1% for 91-day T-Bill futures.
Where this is taught
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
- Series IV · Chapter 6: Trading Mechanism in Exchange Traded IRD
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
Related terms
- Base priceThe reference price a contract starts each trading day from — the theoretical futures price on the day it is introduced, and the previous day's daily settlement price on every day after.
- Daily Settlement PriceThe price at which every open futures position is marked and reset at the end of each day — the last 30 minutes' volume weighted average price of that contract, computed separately for each expiry.
- DeltaThe change in an option's premium for a one-rupee change in the underlying — the first and most used Greek, and the hedge ratio that says how much underlying to hold against an option position.
- Tick sizeThe smallest price change a contract may be quoted in — prices move only in whole multiples of it, and it differs from one commodity to another.
- Corporate Bond Index FuturesCash-settled futures on an index of corporate debt rated AA+ and above, permitted by SEBI in January 2023 to give the corporate bond market a hedge of its own.
- Interest Rate FuturesA standardised exchange-traded contract to buy or sell a notional government security, or an interest rate itself, at a price agreed today for settlement on a future date.
- Position limitsThe maximum open positions the whole market and each trading member or client may hold in interest rate derivatives — set as the higher of a percentage of open interest or a rupee amount, and always specified in lots.
- Quantity freezeThe maximum number of derivatives contracts or lots that can be traded in a single order, set by the exchange to prevent large unintended orders from distorting prices and to catch "fat finger" errors.
- Contract valuePrice or rate multiplied by the lot size or contract multiplier — the number margins, brokerage, transaction charges and regulatory fees are all computed from, and different for every contract.
- Market depthThe quantity of buy and sell orders resting at each price level in the exchange order book — shown up to five price levels a side — that tells a trader how much can be traded before price moves.
- Additional Surveillance MeasuresAn exchange surveillance framework that shortlists securities on unusual price and volume behaviour and client concentration, then raises margins and can narrow price bands.
- Hard underwritingAn underwriter's commitment to buy an IPO's unsold shares, given at the initial filing stage before the issue price is even fixed — the firmer and earlier of the primary market's two underwriting commitments.
- Market order with protectionA combination of a market order and a limit order that lets a market order execute only up to a price level specified by the trader, so it cannot be filled at any price.
- Book built issueA public issue in which the price is discovered from investor bids inside a price band, rather than fixed by the issuer in advance, with allotment made at the cut-off price.
- Cut-off priceIn a book-built issue, the price at which the issue is fully subscribed. Everyone who bid at or above it succeeds and is allotted at that price.
- Block dealA single large trade of at least Rs 25 crore, executed in a special exchange window within 3 per cent of a reference price, settled by delivery and disclosed after market hours.
- Bulk dealAll transactions in a listed stock where the total quantity bought or sold exceeds 0.50 per cent of the company's listed equity shares — in one trade or several in a day — reported and disclosed the same day.
- Circuit breakerA pre-set percentage move in a stock or index that triggers an automatic halt or limit in trading, giving the market time to assess instead of trading on panic.