Unit study guide · NISM Series XVI
Trading Mechanism
13 questions in this unit
What this unit covers
- A small manufacturer wants to hedge through a commodity exchange without becoming an exchange member. Which route is consistent with SEBI’s investor onboarding description?
- For one contract, sell order X offers 2 lots at ₹501 and arrived before Y, which offers 3 lots at ₹500. A valid buy limit order for 4 lots at ₹501 enters an unchanged price-time-priority book. Existing sell-order prices determine executions. What is the average buying price?
- A valid sell stop-limit order has trigger ₹490 and limit ₹488. The trigger condition occurs, but the highest available bid is ₹485. Under the stated limit-order rules, what happens immediately?
- A valid, non-algorithmic IOC buy order is submitted for 12 lots. Five lots execute immediately at acceptable prices and no further match is available. What happens to the remaining quantity?
- A client submits an order for 10 lots. The exchange confirms 4 fills, then acknowledges cancellation of the remaining 6. The client now wants no market exposure. Which statement is correct?
- A customer asks for the September copper futures contract but the order ticket displays October copper futures. The direction and lot count are otherwise correct. What is the most appropriate action before submission?
- Which characteristic most directly supports a reliable physically deliverable commodity futures contract?
- An automated strategy sends commodity orders whenever its signal changes. A coding error repeats the same intended order many times. Which control most directly limits the resulting position build-up before execution?
- A buy order falls within the contract’s allowed price band and passes the broker’s funds check. There is no seller at its limit price or lower. What follows?
- A contract’s last traded price is ₹800. The current bid is ₹798 and ask is ₹804. A customer immediately buys 200 units at the displayed ask. How much more is paid than a calculation using the last traded price? Assume full availability and ignore charges.
- For this question, a broker charges ₹20 per executed order and another charge is ₹5 per contract per side. A trader opens 10 contracts in one order and closes all 10 in a second order, earning ₹2,000 before these charges. There are no other charges. What is the net result?
- An exchange report shows rising open interest in a commodity futures contract. What can be concluded from that information alone?
- A trader finds an old general trading-hours chart and a newer exchange notice specifically changing the session for the contract and date it plans to trade. Which information should be used to determine that session?
Key ideas
From the practice bank · 1
A small manufacturer wants to hedge through a commodity exchange without becoming an exchange member. Which route is consistent with SEBI’s investor onboarding description?
An investor can access exchange trading through a registered intermediary rather than becoming a member of the exchange itself. SEBI’s onboarding description directs the investor to a registered stock broker, with KYC, risk documentation and the relevant account arrangements. Warehousing, assaying and clearing perform different functions. Possessing a commodity or a tax registration is not itself a trading-access authorisation. Remember: Distinguish the client’s account-opening route from the intermediary’s exchange membership.
Hint Common mistake: Assuming physical commodity ownership is sufficient authorisation to enter exchange orders.
XVI-048From the practice bank · 2
For one contract, sell order X offers 2 lots at ₹501 and arrived before Y, which offers 3 lots at ₹500. A valid buy limit order for 4 lots at ₹501 enters an unchanged price-time-priority book. Existing sell-order prices determine executions. What is the average buying price?
Price priority selects the better price before arrival time, and the average fill must be weighted by executed quantities. Y’s ₹500 offer has priority over X’s ₹501 offer despite arriving later. The buyer takes 3 lots at ₹500 and 1 at ₹501. Average price = (3 × 500 + 1 × 501) ÷ 4 = ₹500.25. One lot of X remains unfilled. Remember: Apply price priority first, then calculate the quantity-weighted price of the actual fills.
Hint Common mistake: Using the time stamp to override a better executable price.
XVI-049From the practice bank · 3
A valid sell stop-limit order has trigger ₹490 and limit ₹488. The trigger condition occurs, but the highest available bid is ₹485. Under the stated limit-order rules, what happens immediately?
A trigger activates a stop order, while the limit still controls the worst permitted execution price. The trigger has been reached, so the order is no longer dormant. The activated order is a sell limit at ₹488. It requires ₹488 or better. A ₹485 bid is worse for the seller, so no fill occurs against that bid. Triggering is not a promise of execution. Remember: Separate activation, price protection and actual execution.
Hint Common mistake: Treating a stop trigger as a guaranteed stop-loss exit price.
XVI-050From the practice bank · 4
A valid, non-algorithmic IOC buy order is submitted for 12 lots. Five lots execute immediately at acceptable prices and no further match is available. What happens to the remaining quantity?
An immediate-or-cancel instruction prevents its unfilled balance from waiting in the order book. The order requested 12 lots and has already executed 5. The unfilled balance is 12 − 5 = 7 lots. Under IOC validity it is cancelled, while the five executions remain trades. Remember: IOC can leave a valid partial fill and a cancelled remainder.
Hint Common mistake: Confusing immediate-or-cancel with an instruction requiring the whole quantity to execute or none to execute.
XVI-051From the practice bank · 5
A client submits an order for 10 lots. The exchange confirms 4 fills, then acknowledges cancellation of the remaining 6. The client now wants no market exposure. Which statement is correct?
An order instruction and a completed trade are different records with different consequences. The cancellation confirmation applies to the six lots that were still pending. The four completed trades create a position and remain in the trade record. A separate offsetting trade would be required to close that position in the ordinary course. Remember: Check filled quantity separately from cancelled quantity before judging the remaining exposure.
Hint Common mistake: Assuming an order cancellation is an undo button for all associated executions.
XVI-052From the practice bank · 6
A customer asks for the September copper futures contract but the order ticket displays October copper futures. The direction and lot count are otherwise correct. What is the most appropriate action before submission?
Contract identity includes its and specifications, not merely the commodity name. September and October futures are separate contracts and can have different prices, and delivery dates. The client instructed September. Correcting price or quantity does not convert the October contract into September. Remember: Verify the commodity, expiry, instrument type, side and quantity before transmitting an order.
Hint Common mistake: Matching the commodity name while overlooking the delivery or expiry month.
XVI-053From the practice bank · 7
Which characteristic most directly supports a reliable physically deliverable commodity futures contract?
Deliverable futures need a credible specification and a practical way of delivering conforming goods. Standardisation and verifiable quantity/quality help buyers and sellers understand what satisfies the contract. Unmeasurable quality, concentrated deliverable supply or inability to store can weaken delivery reliability and price integrity. Remember: A useful underlying must support credible standardisation, price discovery and delivery.
Hint Common mistake: Judging suitability only by whether the commodity’s price moves frequently.
XVI-123From the practice bank · 8
An automated strategy sends commodity orders whenever its signal changes. A coding error repeats the same intended order many times. Which control most directly limits the resulting position build-up before execution?
Automation can amplify an operational error, so controls must operate before or during order transmission. The immediate hazard is unauthorised accumulation of exposure through repeated orders. A pre-trade size or exposure limit can reject the excess before it becomes additional trades. Post-trade reports and physical quality tests address different stages and risks. Hiding an order does not stop it executing. Remember: Choose a control that acts before the identified error creates an irreversible exposure.
Hint Common mistake: Treating an automated strategy or a clean display as a substitute for enforced risk checks.
XVI-124From the practice bank · 9
A buy order falls within the contract’s allowed price band and passes the broker’s funds check. There is no seller at its limit price or lower. What follows?
An admissible order still needs a matching counter-order to become a trade. Price-band and funds checks establish whether the order may enter the system. They do not create a willing seller at an acceptable price. The buy limit may remain unfilled under its validity instruction. Remember: Acceptance, execution and clearing are distinct stages.
Hint Common mistake: Interpreting a successful order acknowledgement as proof of a completed trade.
XVI-125From the practice bank · 10
A contract’s last traded price is ₹800. The current bid is ₹798 and ask is ₹804. A customer immediately buys 200 units at the displayed ask. How much more is paid than a calculation using the last traded price? Assume full availability and ignore charges.
The last traded price describes a previous execution, whereas the ask is the displayed selling price available to an immediate buyer. An immediate purchase at the stated ask costs ₹804 per unit, not the earlier ₹800. Difference from the last-trade benchmark = (₹804 − ₹800) × 200 = ₹800. The bid-ask spread of ₹6 is a different comparison from the ₹4 difference asked here. Remember: Use the correct side of the current quote for a trade and the specified price for a benchmark comparison.
Hint Common mistake: Using last traded price as an assured executable price.
XVI-126From the practice bank · 11
For this question, a broker charges ₹20 per executed order and another charge is ₹5 per contract per side. A trader opens 10 contracts in one order and closes all 10 in a second order, earning ₹2,000 before these charges. There are no other charges. What is the net result?
Trading costs may use different bases, including orders, contracts and each side of a round trip. Brokerage = 2 executed orders × ₹20 = ₹40. The per-contract charge applies to 10 buys and 10 sells: 20 contract-sides × ₹5 = ₹100. Net profit = ₹2,000 − ₹40 − ₹100 = ₹1,860. The supplied rates are hypothetical, not current exchange tariffs. Remember: Keep the unit of each fee visible and include both entry and exit where the fee is per side.
Hint Common mistake: Applying an order-based fee as though it were per lot, or charging only the entry leg.
XVI-127From the practice bank · 12
An exchange report shows rising open interest in a commodity futures contract. What can be concluded from that information alone?
An exchange statistic measures a defined market quantity, not the private economic purpose of each participant. counts outstanding contracts. Each open contract has a long side and a short side. A rise does not, by itself, distinguish hedging, speculation, arbitrage or other portfolio activity. Additional evidence is needed to infer motives. Remember: Use published market data for what it measures, not as proof of an unobserved trading motive.
Hint Common mistake: Treating a rise in open interest as a guaranteed bullish signal.
XVI-128From the practice bank · 13
A trader finds an old general trading-hours chart and a newer exchange notice specifically changing the session for the contract and date it plans to trade. Which information should be used to determine that session?
Trading sessions can depend on the contract, date and applicable exchange notices. The task is to establish the session for a specified contract and date, not a general historical timetable. The effective and applicable exchange notice is the relevant operational reference. The trader should also check for a further applicable update. Remember: Check contract and effective date before applying operational timings.
Hint Common mistake: Copying an old commodity-hours table as a universal rule.
XVI-129Lot size is the number of units of the underlying that one derivatives contract stands for.
Read moreExpiry day is the last day on which a derivative contract can be traded.
Read moreLiquidity describes how easily a given quantity can be traded.
Read moreOpen Interest (OI) is the number of futures or options contracts in the NSE F&O segment that are still open.
Read more