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Informist, Thursday, Oct. 3, 2024

 

By Rajesh Gajra

 

MUMBAI – Trading volumes from retail, institutional and proprietary, traders in equity futures and options segment are likely to fall sharply due to the new measures announced by the Securities and Exchange Board Tuesday, according to a few traders and analysts. While the restriction of weekly index options to one benchmark index per exchange from Nov. 20 will lead to lower volumes from retail futures and options traders, the four-times-a-day intraday position monitoring by exchanges is seen to cool down large amount of orders generated from algorithms by foreign portfolio investors and proprietary traders on the expiry day.

 

In the current financial year so far, on the National Stock Exchange of India Ltd., around 96.7% of total equity derivatives notional turnover of INR 47,110 trillion is concentrated in index options. A bulk of index options trades is in weekly index options, and a large part of weekly index options trades take place on the expiry days of the contracts on the indices. The number of indices on which weekly options contracts are available will shrink to two from the current six. Currently, NSE offers weekly expiry in options contracts on Nifty 50, Nifty Bank, Nifty Financial Services, and Nifty Midcap indices, while BSE offers it on the Sensex and the Bankex.

 

The trading volumes could drop by 18-20%, although there could be a spike in participation around expiries, Trivesh D., the chief operating officer, Tradejini Financial Services Ltd. told Informist. The same-day expiry index options contracts hold attraction among options traders because of the lower risks from shorter duration, lower premium amounts, and faster time decay, known as theta, said Trivesh.

 

Post Nov. 20, F&O traders will trade the available weekly expiry contacts, and keenly watch the trading volume and other developments for at least three months before deciding on future course of action, Jaynesh Kasliwal, an individual intraday options trader, told Informist. With choices narrowing down, the trading volume will concentrate to the shift to weekly options contracts in two indices, one each of NSE and BSE, and this may cause more spikes in their contracts on expiry day, Kasliwal said.

 

The institutional traders, particularly foreign portfolio investors, and the proprietary desks of equity derivatives brokers will also be affected, according to some analysts. Ashish Nanda, president and Digital Business head, Kotak Securities, in a post on social media platform X, formerly Twitter, pointed to the impact of the intraday monitoring of position limits for equity index derivatives that SEBI has now mandated and which takes effect from Apr. 1.

 

Nanda said in his post the intraday position limit monitoring "should impact" proprietary traders and FPIs "much more than individual investors...(and) could have some impact on volumes." Nanda also said there are rumours that many of these large investors breach their position limits intra-day but revert to the allowed limits before the market closed.

 

Kotak Institutional Equities, the institutional research team of Kotak Securities, said in a note Wednesday the removal of weekly contracts is expected to be most impactful, followed by the increase in contract sizes, whereas the impact of higher margin and intraday position limits is tougher to ascertain. It said there will likely be an unequal impact, with some investors trading much less than before while others reducing their trades only by a small percentage. This is due to a highly skewed trading activity where around 13% of trades contribute over 90% of options premium volume and around 75% of losses, the brokerage said in the research note.

 

Trading volume of brokerages will be hit on lower client participation. Brokerage Motilal Oswal Financial Services Ltd. said in a report Thursday that turnover for listed brokerage firm, Angel One Ltd., will likely be hit but "changes in customer behaviour are difficult to predict." The brokerage said in the past "the allocation of customers' money from their wallets to trading activities has not changed meaningfully even after regulatory changes." However, Motilal Oswal Financial Services said Angel One could see transitionary hit to earnings.  End

 

Edited by Akul Nishant Akhoury

 

 

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