Mumbai: The National Stock Exchange (NSE), India’s largest stock exchange, is fine-tuning the facility of rolling over derivative contracts on its platform.
Calendar spreads: The NSE building in Mumbai. Live trading of rollover contracts could begin as early as the last week of September. Photograph: Abhijit Bhatlekar / Mint
The derivatives head at a foreign brokerage, who didn’t want to be named, said NSE has informed some large institutional brokers that mock trading for the new facility will begin on 2 September. The live trading could begin as early as the last week of September, when the September series of derivative contracts expire.
This could be a precursor to genuine “calendar spread” or rollover contracts, which allow customers to buy and sell near- and far-month contracts in one transaction.
An email sent by Mint to NSE didn’t elicit a response.
The Singapore Exchange, which also offers trading on Nifty futures, already provides calendar spreads. The market share of daily Nifty futures volumes in Singapore has climbed from about 1% in October 2007 to 11% in July, after the capital market regulator put restrictions on participatory note issuances last October.
In India, much of the volumes in equity derivatives centre around the contract that expires in the same month, although traders have the choice of entering into contracts for the next month and the month after. These contracts are called near-month contracts. Since liquidity is centred around near-month contracts, most traders take their positions in this series.
In case of index options, there is wider choice, with expiry months being as far as three years, as well.
Even traders who want to keep their positions open for a longer time frame first buy a near-month contract and then carry over or roll over to the next month, by selling the existing position and creating a new position in the next month’s series.
Such rollover activity picks up about seven-eight days ahead of the expiry and can be quite cumbersome not only for traders but also for brokers who execute these deals. Currently, brokers place two separate orders in the trading system— one to offset the existing position in the near-month contract, and another that creates a new position in the next month’s series.
With calendar spreads, the two orders can be placed at one go. Although NSE offered this facility earlier, the broker said the order could only be placed under the “immediate or cancelled”, or IOC, category.
IOC refers to orders which are cancelled automatically by the trading system, if they are not executed immediately after the order is entered.
Since calendar spread orders involve two separate orders, there is a possibility that one of the two orders gets executed and the other gets cancelled because prices in the trading system changed. This is why there are hardly any users of the calendar spread facility on NSE.