Risk associated with BO/CO

Hi Nithin/Zerodha Team,

Going through Nithin’s post here on risk:

What are the underlying risk on BO and CO which are typically closed around 15:20 (unless automatically triggered with stop loss or profit target)? Typically cover orders are highly levereged - for a nifty50 script it’s around 20.8 times because BO/CO are always associated with a SL amount which is typically maxed at 1.5.

My question:

When I buy a stock say TCS as a CO for 1 lakh margin with 1% SL - I actually am buying TCS shares worth of 20.8 lakh and risking maximum of 20.8K(+any impact cost). My understanding was - when I cover order is placed, it is placed at exchange level and zerodha or any brokerage doesn’t have anything to do on the closure of the trade. My question is - what could go wrong further in this case?

  1. Could it be possible that CO/BO are not squared off by EOD or SL triggered in any unforeseen situation?

Hypothetical situation 1: TCS goes down by 5% and somehow my position wasn’t closed - could this be a very unlikely but probable event?
Hypothetical situation 2: Zerodha loses all connectivity with exchange at 3:00 PM till market close and TCS goes down 5% after 3:10. What happens to my position?

  1. What could possibly cause these type of event? Can brokerage infra failure cause this type of issue?
  2. Are traders protected under these kind of ‘black-swan’ incidents?
  3. What other risk excess to SL(+impact cost) I should be prepared after executing a CO/BO (however unlikely that might be) ?

Last but not the least : I have highest regards for your platform and the way you are revolutionizing the trading environment in India. Your tech team is one of the best - they are truly world class. Other trading platforms to zerodha are horse cart compared to F11 in terms of technology and vision. But I would like to understand and minimize any possible issues that might arise which is within or outside my control.

All the best once again!

In case of CO, entry order is market. Which means, as soon as you fire the order, it gets executed immediately and the stoploss orders are instantly placed on the exchange. Once the SL order is placed on the exchange, there is no way your order will not be squared off.

In case of BO, entry order is limit and if it is pending on the exchange, the corresponding target/SL is still not sent to the exchange. It gets sent as soon as the limit order is executed. If we loose complete connectivity and your limit order gets executed, the corresponding target/SL will not get placed on the exchange. Very small chance, but yes possible. If your entry bracket order trades, then SL and target gets placed on exchange. Once on exchange no risks.

But yeah, there is one tiny tiny risk, assume a stock suddenly falls circuit down or goes up circuit. Essentially meaning all buyers or sellers disappear for some reason, then pending SL or target both in CO/BO can go pending. This won’t happen on stocks which trade on F&O as they have circuits. But can happen on stocks outside top 200.

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