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.
Where this is taught
- Series V-D · Chapter 15: Introduction to Forwards and Futuresintroduced here
- Series VIII · Chapter 3: Introduction to Forwards and Futuresintroduced here
- Series X-A · Chapter 6: Securities Market Segmentsintroduced here
- Series IV · Chapter 3: Exchange Traded Interest Rate Futuresintroduced here
- Series V-D · Chapter 20: Exchange Traded Interest Rate Futures
- Series IV · Chapter 6: Trading Mechanism in Exchange Traded IRD
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 exposure levels the entire market and each trading member or investor may reach.
- Quantity freezeThe maximum number of contracts or lots that can be traded in a single order, set by exchanges to prevent large unintended orders and fat finger errors.