Why are limit orders placed far from LTP being rejected?

Limit orders that are placed far away from the LTP are restricted to avoid freak trades. The price discovery process or mechanism is an activity where prices are determined by the demand and supply of a security through the interaction between the buyers and sellers via orders placed. It has been observed that few traders are placing orders which are in no way related to the current market price of the contract, or orders are placed with prices that are far away from the last traded price. Trades placed at such unrealistic prices may lead to instability in the price discovery process which may lead to freak trades.

To address this issue, For stock and index options, Zerodha is blocking limit orders that are placed 50% to 150% away from the last traded price (LTP). For stock and index options, this block applies only when a trader places a limit buy order 150% above the LTP or a sell order 50% below the LTP. However, this restriction does not apply if the LTP is below ₹100. If a trader wishes to place a limit order outside of these limits, GTT (Good Till Triggered) orders can be used instead.