SEBI's move to boost derivatives trading is a short-term fix
SEBI's move to boost derivatives trading is a short-term fix.
What's proposed: To broaden and boost derivatives trading in the country, market regulator Securities and Exchange Board of India, or SEBI, has decided to allow stock exchanges to introduce liquidity enhancement schemes, or LES, in their equity derivatives segments. The exchanges will be allowed to design these schemes to suit their needs. They will also be allowed to offer incentives within specified limits to market makers. A market maker is a broking firm or market intermediary that gives quotes for a financial instrument and enables trading in securities at any time. New exchanges, such as MCX-SX and United Stock Exchange, can use LES for any of their new products. However, old exchanges, such as BSE and NSE, can use LES only for illiquid securities, in which the average trading volume for the last 60 trading days is less than 0.1 per cent of the market capitalisation of the underlying stocks. The schemes will end when the average trading volume reaches one per cent of the market capitalisation, or in six months, whichever is earlier.
What will change: At present, stock-specific trading accounts for just 18 per cent of the overall trading in futures and options, or F&O, on NSE (the remaining 82 per cent is in index F&O). Although NSE offers trading in 233 stocks in its F&O segment, the bulk of the transactions are in only about 10 heavyweight stocks, including SBI, Tata Motors, and Reliance Industries. Equity derivatives trading on BSE is in worse shape: it barely occurs. SEBI's move is expected to add depth and reduce the current lopsidedness in the derivatives trading.
Implications: Introducing such schemes could increase liquidity, but market experts say that this will not translate into drastic changes. "Market-making can be classified as induced liquidity, which leads to short-term liquidity enhancement, while actual liquidity is a function of increased participation by different classes of investors," says Vijay Kanchan, Vice President and Head of Derivatives, JM Financial Services, referring to the poor participation by insurance firms, mutual funds and pension schemes in the derivatives markets. He points out that insurance firms and pension funds are sitting on piles of cash. "But they cannot invest in F&O markets because of regulatory issues," he adds. "Mutual funds could invest, but they have been marginalised after SEBI's decision last year to bar them from writing options." On June 22, mutual funds bought derivatives worth just Rs 589.87 crore out of a total of Rs 88,698 crore derivatives bought on NSE. "SEBI should also consider rationalising the minimum contract size - in terms of either value or lot size - which will attract new and smaller retail investors," Kanchan says.
What will change: At present, stock-specific trading accounts for just 18 per cent of the overall trading in futures and options, or F&O, on NSE (the remaining 82 per cent is in index F&O). Although NSE offers trading in 233 stocks in its F&O segment, the bulk of the transactions are in only about 10 heavyweight stocks, including SBI, Tata Motors, and Reliance Industries. Equity derivatives trading on BSE is in worse shape: it barely occurs. SEBI's move is expected to add depth and reduce the current lopsidedness in the derivatives trading.
Implications: Introducing such schemes could increase liquidity, but market experts say that this will not translate into drastic changes. "Market-making can be classified as induced liquidity, which leads to short-term liquidity enhancement, while actual liquidity is a function of increased participation by different classes of investors," says Vijay Kanchan, Vice President and Head of Derivatives, JM Financial Services, referring to the poor participation by insurance firms, mutual funds and pension schemes in the derivatives markets. He points out that insurance firms and pension funds are sitting on piles of cash. "But they cannot invest in F&O markets because of regulatory issues," he adds. "Mutual funds could invest, but they have been marginalised after SEBI's decision last year to bar them from writing options." On June 22, mutual funds bought derivatives worth just Rs 589.87 crore out of a total of Rs 88,698 crore derivatives bought on NSE. "SEBI should also consider rationalising the minimum contract size - in terms of either value or lot size - which will attract new and smaller retail investors," Kanchan says.
