NISM Series VIII · Unit 6 of 10 · about 4% of the paper
Introduction to trading systems: NISM Series VIII notes and practice questions
How orders are placed and matched in the exchange's electronic system.
What to know in Unit 6
- Order types and priority.
- Trading hours.
- Position limits and bans.
Key terms, examples and exam traps
Order matching
Orders on the exchange are matched on price-time priority: the best price first, and among equal prices the earliest order.
Example. Two buyers bid the same price and the earlier order is filled first.
Exam trap. This statement is false: Orders are matched on the largest size first.
Order types
Common order types are limit, market, stop loss and IOC (immediate or cancel); each controls price and timing differently.
Example. A trader uses an order that executes immediately or is cancelled.
Exam trap. This statement is false: Only limit orders exist in the derivatives segment.
Market maker
A market maker quotes continuous two-way prices to provide liquidity in a contract.
Example. An entity always quotes both buy and sell prices to keep the market liquid.
Exam trap. This statement is false: A market maker only buys, never sells.
Market-wide position limit
The MWPL caps the total open positions across all traders in a stock's derivatives; when it reaches 95% the stock enters a ban period.
Example. A stock's derivative position exceeds 95% of the limit and is banned for fresh positions.
Exam trap. This statement is false: MWPL applies only to index derivatives.
Ban period
In the ban period, traders can only reduce their open positions in the stock; fresh positions are not allowed.
Example. A trader can square off but cannot build new positions in a stock under restriction.
Exam trap. This statement is false: During a ban period all trading is banned.
Client position limit
Position limits restrict the open positions a single client or member can hold, to prevent concentration and manipulation.
Example. A single client cannot hold unlimited open positions in one stock.
Exam trap. This statement is false: There are no limits for a single client.
Trading hours of derivatives
The equity derivatives segment trades during regular market hours, 9:15 am to 3:30 pm, on business days.
Example. A trader places a futures order at 10 am on a working day.
Exam trap. This statement is false: Equity derivatives trade only in the pre-open session.
Price band in derivatives
Derivatives have operating ranges that stop orders far from the last price, to prevent erroneous trades.
Example. An order far away from the market price is rejected by the system.
Exam trap. This statement is false: There is no price protection in derivatives.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which statement best describes “Market maker”?
- The fair price of a futures contract is the spot price plus the net cost of carry; deviations create arbitrage opportunities.
- Theta measures the loss in option value as one day passes, other things equal. It hurts option buyers and helps sellers.
- A market maker quotes continuous two-way prices to provide liquidity in a contract.
- The underlying is the asset or index on which a derivative contract is based.
Q2. Which statement best describes “Ban period”?
- A forward contract is a private agreement to buy or sell an asset at a fixed price on a future date. It is customised and traded over the counter, with counterparty risk.
- OTC derivatives are privately negotiated and tailor-made but carry higher counterparty and liquidity risk.
- In the ban period, traders can only reduce their open positions in the stock; fresh positions are not allowed.
- The daily settlement price of futures is generally the closing price (average of the last half hour), and positions are marked against it.
Q3. Which term is described here? The equity derivatives segment trades during regular market hours, 9:15 am to 3:30 pm, on business days.
- Trading hours of derivatives
- Option premium determinants
- Settlement of stock options
- Base value
Q4. Which term is described here? Derivatives have operating ranges that stop orders far from the last price, to prevent erroneous trades.
- Price band in derivatives
- Position squaring and exercise
- Convergence
- Settlement guarantee fund
Q5. Which statement best describes “Order types”?
- Common order types are limit, market, stop loss and IOC (immediate or cancel); each controls price and timing differently.
- Because only margin is paid upfront, futures offer leverage: a small price change can produce a large percentage gain or loss on margin.
- Intrinsic value is the amount by which an option is in the money, and is never negative. For a call it is the greater of (spot − strike) and zero.
- A speculator takes positions in derivatives to profit from expected price changes and accepts the risk.
Q6. Which statement about “Client position limit” is correct?
- A European option can be exercised any time before expiry.
- Position limits restrict the open positions a single client or member can hold, to prevent concentration and manipulation.
- There are no limits for a single client.
- Vega measures the effect of interest rate changes.
Frequently asked questions
How much of NISM Series VIII comes from Unit 6?
Unit 6 (Introduction to trading systems) usually carries about 4% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series VIII Unit 6?
Order types and priority. Trading hours. Position limits and bans.
Are these NISM Series VIII practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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