Mumbai: Trading turnover in the Indian derivatives market has fallen by more than 40% in value in the last two months as traders offloaded leveraged positions and arbitrage opportunities between spot and futures vanished.
In value terms, the outstanding open interest of stock and index futures is down to between Rs51,000 crore and Rs53,500 crore at end of the February settlement.
It ranged between Rs87,000 crore and Rs91,100 crore when the December contracts expired, according to data compiled from three broking firms.
“Positions are down due to unwinding of speculative positions. There was sharp fall in open interest when the stock prices crashed,” said T.S. Harihar, vice-president (equity derivatives), Karvy Stock Broking.
In January, when stock prices of most companies were at their peaks, traders had taken huge positions in the futures and options. When markets crashed in end-January, traders sold their positions to meet margin calls and book profit or loss.
“People are tired of holding leveraged positions. When you know the price is not likely to increase, why would you like to hold?” said Sailav Kaji, head of derivatives at PINC Research.
Institutional interest has come down and the arbitrageurs activity has also reduced, said Karvy’s Harihar.
Arbitrageurs are key players in the stock market as they provide liquidity by buying and selling in both the derivatives and spot markets.
India’s National Stock Exchange 50-share index has fallen 14.1% in the two months ended 29 February.
There has been a steeper fall in mid-cap stocks with the Nifty mid-cap 50 down around 24%, with some stocks in the 50 index losing half their value.
This month, as stocks extended losses, Nifty lost almost 9% by the end of trading on 7 March.
The difference between the spot and futures prices, which would justify holding on to a futures position, must widen to attract traders and boost volumes, said Aalap Shah, derivatives analyst at Dolat Capital Market.
This difference, one of the main components in calculation of the cost of carry, is now around 20 basis points from 100 basis points in early January, Shah said, which won’t cover the operating costs for arbitrageurs, deterring them from trading.