To prevent the occurrence of freak trades, NSE stopped the stop loss market (SL-M) facility in options trading in September 2021. However, the stop loss order with limit conditions will continue to be available for all contracts.
A freak trade happens when a large buy or sell order is mistakenly placed at a price which is far away from market price, triggering the stop-loss set by investors.
Stop-loss is an advance order to sell a security after it reaches a particular price point. It is used to limit the loss in a trade. For example, if a trader has taken an option at ₹120 and wants to limit the loss to ₹105, they have to place a stop loss to sell at ₹105.
What is Stop loss - market order?
However, if one chooses stop loss - market (SL-M) and not a particular price in the stop loss option, it will get executed as a market order at the best bid price available that time. In case of freak trade, the order will be executed, causing loss for investors.
For instance, if Asian Paints stock trades at ₹1,800 and a trader puts ₹1,750 as a stop loss market order, the order will get executed once the price falls below ₹1,750.
At the same time, if a freak order is at ₹1,400, the chances of stop loss market order to get executed are high.
Difference between stop loss market order and stop loss limit order
A stop loss market order is a kind of stop loss order where the trade order generated after the trigger price is, in fact, a market order. As soon as the trigger price is reached, a market order is generated and immediately executed at the market rate.
On the other hand, a stop loss limit order is an extension of stop loss order where a limit execution price is also selected along with the trigger price.
So, we can summarise that a stop loss market order is a kind of order where the final order which is generated after the trigger price is, in fact, a market order.