Software Anomalies In Automated Trading

NIFTYBEES is an ETF product by Goldman Sachs and it is quite popular as it allows you to buy a basket of all NIFTY shares as per their weightage in the NIFTY index. In times like this where turbulence is the norm and not an exception, diversification is the most important tool to protect yourself. It would seem nothing better than NIFTYBEEES that allows you to buy top fifty underlying stocks by the market capitalisation of the country.

Usually the NIFTYBEEES trading price is in tandem with the underlying NIFTY price. It is NIFTY / 10 + 1.04%. So to arrive at NIFTYBEES price you need to use the multiplier of .1014.

So for instance if the NIFTY is at 8000, NIFTYBEES should be at 811.20.

This is how it is supposed to work, but it does not work this way. NIFTYBEES is a tradable commodity and runs on a trading software. As all software due to bugs create functional anomalies, NSE trading software is no exception.

During the intense selling pressures NIFTBEES prices go out of whack with the NIFTY prices leaving the traders gasping for air. You can sometimes lose money on ETFs simply if you don’t buy and sell correctly. Never buy ETF on the market price, always look up the price listed on Goldman Sachs website and place a limit order to buy and sell and not the market order.




The image on the left represents NIFTY with NIFTYBEES toward its right.

Let use see the second candle from left. NIFTY went on an intraday low of 8424 on 17 August 2015. This should have translated in to the NIFTYBEES price of 854. But if you notice the graph carefully at the same very instance the NIFTYBEES went on an intraday low of 797 creating a huge anomaly of 7%. Since it is a trade, the seller lost 7% with the buyer gaining 7%.

Such kind of distortions happen quite often. We are working in the largely automated market makers who match buyers with sellers and sometimes it creates huge gaps between the two, to signal a problem and coax traders to chill on the sidelines until prices normalize.

If you are smart you can take advantage of this situation.

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