Shifting pattern in equity derivatives ::Business Line

The BSE is gradually increasing its presence in the equity derivative segment.

Indian stock markets moved from the badla regime to futures and options in 2000 with the launch of Nifty futures.

Indian traders initially preferred trading in futures due to its similarity with the badla trades.

Options were also viewed as more exotic and complex instruments. Index futures and stock futures jointly comprised more than 85 per cent of the derivative turnover till 2007-08.

That was probably the period when retail participation in derivatives was greater. The 2008 crash led to a shift in trading pattern.

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Retail investors lost heavily, trading in stock futures, and exited the market altogether. This led to shrinking in the proportion of stock futures, from more than 55 per cent in the period prior to 2007-08 to less than 15 per cent now.

With the growing dominance of more informed and savvy traders, trading in options has increased since the crash. Index options accounted for 72 per cent of the value of futures and options traded last fiscal.

Another fact that needs to be highlighted is the deceleration in growth in the derivative segment. 

Annual growth in the value of contracts traded was more than 50 per cent between FY 06 and FY 11 (barring 2008-09 when volumes declined 16 per cent).

But volumes grew at a sluggish 7 per cent last fiscal. Average daily turnover also displayed a similar trend.

BSE IN DERIVATIVES

The Bombay Stock Exchange, which had negligible presence in the equity derivative segment until last September, is gradually increasing its share in this pie. This was made possible through the launch of liquidity enhancement scheme through which intermediaries were incentivised for trading in derivatives.

It is currently notching up turnover between Rs 20,000 crore and Rs 30,000 crore every day. This is more than one-third of the turnover recorded by the NSE.

There are doubts over the sustainability in the volumes once the scheme ends. But if volumes continue to grow, investors can choose between Sensex and Nifty futures and options for hedging.

Arbitrage opportunities would also be available as traders can bet on the price difference in Nifty futures and options between the two exchanges.

Since the Sensex has a better brand recall among overseas investors, it is possible that the volumes of Sensex futures and options show a steady increase in the coming years.