MCX Stock Exchange has launched currency options on the dollar-rupee pair, its first new product after receiving approval from the Securities and Exchange Board of India (Sebi). Trades worth 184 crore were executed on the exchange on Monday, understandably much lower than the 2,497 crore turnover clocked by the National Stock Exchange (NSE), which introduced currency options in October 2012.

Unlike currency futures, Sebi has given exchanges a little leeway with product specifications. MCX has used this to differentiate its offering a bit. The tick size of its options product has been set at 10 basis points, compared to 25 basis points in the case of NSE. The tick size is the smallest possible price by which the price of an exchange-traded contract can move. In the case of stocks, the tick price has been set at 5 paise. In the case of currency futures, both exchanges have set the tick size at 0.25 paise.

Illustration: Shyamal Banerjee/Mint

Needless to say, only time will tell if MCX has found the right balance while setting the tick size at 0.1 paise. According to Pramit Brahmbhatt, chief executive at Alpari Financial Services India, “Currently there isn’t sufficient liquidity in the exchange-traded currency options segment, and I doubt only reducing the tick size will help generate liquidity. Traders can be expected to be indifferent to the tick size and will be more keen to participate in contracts that are more liquid."

It should be noted here that unlike the equity derivatives segment, which is dominated by options trading, futures trading still rules the roost in the currency derivatives segment. On NSE, dollar-rupee futures worth 10,563 crore traded on Monday, more than four times the turnover in the options segment. Having said that, the open interest or outstanding positions in the latter were only 21% lower compared with the futures segment, signifying that a far greater level of genuine users are trading in the options segment.

It’s heartening to note that Sebi has given some room for exchanges to differentiate on product specifications; although it goes without saying that it needs to get a lot more flexible. Currently it decides on everything from contract size to trade timings. Unless exchanges can differentiate on product features, it will be extremely difficult to compete.

Another heartening sign is that MCX’s currency options volumes, at least initially, have been reasonably modest at around 7% of the total market. This is a far cry compared with United Stock Exchange’s currency futures launch two years ago, when it emerged as the No.1 on the day of its launch. Back then, bankers and financial market experts had said that one should ignore the volumes on the first day of an exchange’s launch, since they are often artificial in nature, propped up by friendly brokers to give an impression that the newly introduced contract is liquid. Thankfully for market participants, things have changed for the better, with the weakening in the rupee leading the central bank to watch the currency derivatives markets much more closely. Some of the central bank’s strictures on the market may be unwelcome, but the positive fallout of its increased vigilance is that exchanges will think twice before generating artificial volumes.

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