Mumbai: The Bombay Stock Exchange, or BSE, will offer futures and options traders a chance to play a different trading cycle as part of a new tactic by Asia’s oldest bourse to revive its struggling derivatives segment.
The exchange has recently got approval from the Securities and Exchange Board of India, or Sebi, to start a new expiry cycle for its stock futures and options contracts.
Futures and options contracts traded on BSE expire on the same day as similar contracts traded on rival National Stock Exchange, or NSE: the last Thursday of each month. On this day, contracts are settled and a trader who wants to continue his position rolls over the contracts to the next month.
BSE proposes to change it by a fortnight, by moving it to a Thursday in the middle of every month.
A senior Sebi official said last week the approval has been given after careful consideration of various implications. “We have given our approval; it is for them to decide when they will start the new cycle,” said the official, who did not want to be identified.
Kalyan Bose, BSE’s head of corporate affairs, declined to comment.
According to a BSE official who did not want to be identified, these efforts should not be looked at in isolation. “These moves are part of larger efforts to revive the derivatives segment and reposition the exchange,” he said.
Madhu Kannan, BSE’s new managing director and chief executive, had said in August that he had put in place the building blocks for a new BSE and the four pillars of his revamp strategy are talent, sales, innovation and technology.
Apart from revamping its top team, the exchange has picked up a 15% stake in United Stock Exchange Ltd and bought Marketplace Technologies Pvt. Ltd—a software and information technology (IT) services firm that offers broking and trading solutions for capital, derivatives, commodities and currency markets, financial services and IT consulting.
BSE’s share in the cash market is about 24% but insignificant in derivatives trade. The daily derivatives volume at NSE averaged Rs75,520 crore in October. The comparable figures for BSE are not available, but in September, its entire month’s turnover was Rs3 crore. NSE’s September turnover was Rs13.88 trillion.
Traders and analysts are divided on whether the new trading cycle will help BSE fight back.
Nirakar Pradhan, chief investment officer, Future Generali India Life Insurance Co. Ltd, said the introduction of a new expiry cycle will help in increasing the number of trades. “A new cycle will release more money into the system and there will be a new cycle every 15 days now. This will open up a lot of possibilities for traders and investors.”
But not everybody is sure whether BSE’s attempt to launch stock futures with mid-month expiry cycles will help it regain market share. “It will not have any effect unless there is sufficient liquidity on the exchange. If BSE comes out with derivatives with shorter duration, it may help the exchange to see some volume,” said V.K. Sharma, head of research, Anagram Stockbroking Ltd, an Ahmedabad-based securities firm.
Rajiv Varma, a derivatives analyst with India Infoline Ltd, another domestic brokerage, is sceptical about the move. “The volume is not there,” he said. According to him, with two exchanges offering two different derivatives expiry cycles, it will be difficult for the broking community to take two different views. Besides, it will also double the back-office work.
Yet another broker, on condition of anonymity, said the reason behind the surge in NSE’s derivatives volume is the superior bid-ask spreads on the exchange—the difference between buy and sell rates at any given point. “Superior spreads result in higher trading volumes,” he said.
At present, futures and options are available on 179 stocks on NSE, while BSE offers derivatives on 85 stocks.
BSE commenced derivatives trading in June 2000 by launching the first exchange-traded index derivative contract its bellwether equity index Sensex and NSE launched Nifty futures three days later. But the younger rival surged ahead by pushing single stock derivatives aggressively. In fact, NSE launched trading in single stock derivatives a year ahead of BSE.
Though index futures and index options were listed ahead of stock options and stock futures, stock futures have raced ahead of all other contracts.
BSE tried to match NSE by launching weekly options in 2004 for four stocks including Reliance Industries Ltd and State Bank of India in addition to Sensex. But even that did not help it regain volume.
After several failed attempts to boost derivative trading volume, in 2007 BSE appointed two of its corporate broker members—Delhi-based SAM Global Securities Ltd and Hyderabad-based Apollo Sindhoori Capital Investments Ltd as market makers for the Sensex futures. These two firms offered two-way buy and sell quotes and ramp up the average daily turnover in the first quarter of calendar year 2008 to Rs1,000 crore. But the scheme was withdrawn in July 2008 after the exchange’s audit committee found faults with the process. Consequently, the turnover nosedived.
Market regulator Sebi has recently slapped a show-cause notice on the exchange for allegedly violating certain regulations in market-making.