Why can't market orders be placed for certain index and stock option contracts at Zerodha?
To address this, market orders are blocked for illiquid index options and all stock options. Additionally, SL-M orders are blocked for all Index option derivative contracts as they are discontinued by the exchanges. For FinNifty, MidCPNifty, Sensex and Bankex, market orders are only permitted for option contracts with an Open Interest (OI) of over 500 lots or 20,000 quantities.
Market orders can be placed for Nifty and Bank Nifty options with sufficient liquidity in the current and next week and the current month's expiries. However, market orders are blocked for weekly expiries other than the current and next week, monthly expiries other than the current month, and deep ITM (in the money) contracts exceeding 5%.
A market order is an instruction to buy the specified quantity of a scrip irrespective of its available price. In the case of illiquid contracts, the bid/ask price could be at a price far from the last traded price or the theoretical price of the contracts. Customers have placed market orders without checking bids/asks on such contracts and losing money due to trade execution at arbitrary prices. Market orders are hence blocked for illiquid index options and all stock options.
A market order in After Market Orders (AMOs) is blocked for monthly index options. However, limit orders can be placed at or above the best bid/ask price to execute trades instantly, similar to a market order.