India's exchanges spar for dominance in
hot derivatives market
The NSE plans to launch options contracts based on
key sectoral indices, including the pharmaceutical and IT indices, if it gets
the regulatory go-ahead, according to two exchange sources India's top stock
exchanges are luring investors with new products and lower fees as they battle
for a share of the hot but fledgling derivatives market, in turn fuelling a
surge in trading activity that is drawing regulatory scrutiny.
The larger National Stock Exchange of India and its
older rival BSE are wrestling for dominance in derivatives, particularly the
raging options market spurred by the introduction last year of short-term
contracts that can be traded with borrowed funds.
The monthly notional value of derivatives traded on
Indian exchanges exploded to an eye-popping ₹8,737 trillion ($104.65
trillion) in March 2024, more than double that of a year earlier, data from the
regulator shows.
The NSE plans to launch options contracts based on
key sectoral indices, including the pharmaceutical and IT indices, if it gets
the regulatory go-ahead, according to two exchange sources.
In April, it launched option contracts on a Nifty
Next 50 index of the 50 largest stocks which are not in the benchmark Nifty
index.
It has reduced transaction fees and a wider review
to further reduce charges is underway, said the sources, declining to be
identified as they are not authorised to speak to the media.
Not to be left behind, the BSE plans to launch
options contracts based on indices of the top 50 and top 100 companies by
market value, a source familiar with the exchange's plans said, also declining
to be identified.
The exchange will launch "complementary
products" and "relaunch languishing products", Sundararaman
Ramamurthy, chief executive of BSE told Reuters, without elaborating.
"We do not consider ourselves in competition
with NSE," Ramamurthy said. "They have been very large for the last
23 years and we have just started getting traction."
Details of the new products planned by the two
exchanges have not been previously reported.
BSE's aggressive strategy has pushed up its market
share in derivatives trading from less than one percent to 17% in the twelve
months ending March 2024, denting NSE's near monopoly on derivatives trading in
India.
Options volumes have rocketed as well. Of the 108
billion options contracts traded worldwide in 2023, 78 per cent were on Indian
exchanges, according to data from the Futures Industry Association.
Both exchanges have seen revenues rise, with the BSE
reporting a 55% increase in the nine months ending December 2023 and NSE a 21
per cent increase. For NSE, 80 per cent of its revenue comes from transaction
charges, for BSE it is 38 per cent as per exchange disclosures.
The competition has caught the attention of market
regulator, the Securities and Exchange Board of India (SEBI).
Earlier this week, SEBI asked the exchanges to pay
higher regulatory fees based on the notional value of derivatives traded, after
which BSE raised its transaction fees. SEBI is also scrutinising the incentives
given by exchanges to brokers, two regulatory sources told Reuters. The
regulator is probing the practise of charging lower transaction fees for
brokers with high turnover, the sources said.
SEBI has not so far responded to a Reuters request
for comments. An NSE spokesperson did not respond to an email seeking comment.
DERIVATIVES BOOM, RISKS RISE
The value of derivatives traded in India in 2023 was
421 times traditional cash trading - the highest among major global markets,
Axis Mutual Fund said in a report last year.
An options contract expiring daily has definitely
bumped up options trading in India," said Nithin Kamath, chief executive
and co-founder, Zerodha, India's largest broking firm.
Retail investors now make up 35% of derivative
trading in the country, prompting the regulator to issue repeated warnings on
the risks of such trading. Indian regulators will form a panel to study the
risk posed by the derivative trading surge, Reuters reported last month.
Options expiring on the same day, known in technical
parlance as 'zero day to expiry' options, are particularly popular among retail
investors.
For Cusrow Sadri, 51, the wide variety of options
and daily contract expiries introduced by exchanges over the past year has
meant an opportunity to make higher returns.
"I made a profit of 30% on my capital last
year," said Sadri, who quit his job in the airline industry satisfied with
his "good" earnings via options selling.
Siddharth Joshi, a 36-year old from Surat in western
India, gets the opportunity to trade more because of the shorter term expiries,
he said.
"The multiple expiries have helped in making a
neat profit," said Joshi whose average trade is around 50,000 Indian
rupees ($599.11).
According to a SEBI study of January 2023, nine out
of ten investors made losses while trading in derivatives.
Nudged by SEBI, both BSE and NSE have launched
investor awareness campaigns and issued warnings on risks associated with
trading in options.
But BSE's Ramamurthy said exchanges cannot be held
responsible.
"Exchanges do not decide the participants, it
is the market which decides," Ramamurthy said. "We can only take
steps to reduce risks posed by the rise of retail option traders."
The two exchanges have now shifted focus to wooing
institutional investors, including foreign ones.
The BSE is holding regular meetings and roadshows
with domestic brokers and foreign institutions, and offering more co-location
racks which allow traders to locate their servers in the exchange premises for
faster access to data and exchange systems, Ramamurthy said.
www.thehindubusinessline.com
dt. 06-05-2024