NSE Price Bands: More Freedom for 230 Stocks Today?

With effect from Dec 05, the NSE (National Stock Exchange) has implemented a considerable recalibration of risk management parameters. NSE is adjusting the price bands for 230 stocks, signalling growing confidence in market depth.

The exchange has widened the trading limits for the majority of these counters. Specifically:

• 128 stocks have seen their circuit limits raised to 20% from 5%.
• Another 90 stocks have moved to the 10% bracket.
• A small basket of 10 stocks (including TVS Electronics), has seen limits tightened to 5%, with Cura Technologies restricted further to 2%.

Post revision, 2,275 of the 3,060 listed stocks will trade within the 20% band.

Alongside this, the Nifty Bank index is also planning to go through a major restructuring. The index’s top three constituents will have new weightage caps of 19%, 14%, and 10% for top stocks. The aim of this strategy is to curb concentration risk.

There is a dual development of relaxing individual stock limits while tightening index construction rules. It is an indication of change in how the exchange manages volatility and liquidity.

These changes are set to alter the playing field for market participants. The restructuring might offer more room for price discovery in mid-cap counters while forcing a diversification of risk in the heavyweight sectoral indices.

But there is an important question for the investors: does this relaxation signal a mature bull market ready for unrestricted price movement, or could it lead to bigger price swings?

Why is NSE Widening the Limits Now?

The decision to widen price bands reflects a vote of confidence in the liquidity and stability of these stocks. It could also be a signal that the risk of price manipulation has receded.

When a stock is stuck in a narrow circuit filter, it can hamper genuine price discovery. If a company announces stellar earnings that justify a huge jump, a narrow band can artificially choke the rally. It can thus trap buyers and create a backlog of unfilled orders. The NSE is allowing stocks like Basilic Fly Studio, HT Media, and Iris Business Services to breathe by moving them directly to the higher, standard bracket.

With the wider bands, a stock can react fully to news flow in a single session. Liquidity can improve when price discovery is unhindered. This can reduce the entry and exit risk, thus benefitting traders.

However, the tightening of bands for stocks like TVS Electronics and Global Education can also be a reminder that the regulator is still watching. A reduction in circuit limits can act as a speed bump and force the market to slow down and reassess the valuation.

Nifty Bank Overhaul: A Move for Stability?

An overhaul is coming for the Nifty Bank and Nifty Financial Services indices. They will undergo structural changes to align with SEBI’s improved risk-monitoring norms. To address “concentration risk,” strict weightage caps will be applied to the top three constituents.

With this move, the NSE is trying to ensure that the benchmark is a truer reflection of the entire banking sector, rather than just a proxy for the largest private banks.

Furthermore, the inclusion of new entrants like Union Bank of India and Yes Bank indicates broader inclusivity.

What Does This Mean for Market Efficiency?

The widening of bands in the broader market suggests that the "mid-cap and small-cap" space is considered strong enough to handle volatility without the training wheels of tight circuit limits.

There can be faster wealth creation (or destruction), placing the onus of risk management back on the investor rather than the exchange mechanisms.

On the other hand, the index changes can protect the retail investor from single-stock shocks within a benchmark. Circuit filters (price bands) are artificial barriers that can prevent prices from instantly reflecting all available information, creating what economists call "friction."

By easing these constraints, the NSE is reducing friction and allowing the market to move closer to a semi-strong form of efficiency, where prices can rapidly adjust to new public information. Additionally, the exchange may be structurally supporting a more efficient frontier for index investors by enforcing a broader distribution of weights.

Source

Economic Times
Business Standard