The BSE stock has gained nearly 8% in the last two trading sessions on hopes of Sebi’s review of the closing auction session (CAS). CAS was introduced from 3 August for closing price discovery and replaced the earlier method of volume weighted average price (VWAP). This led to extreme price swings, resulting in dwindling derivatives (F&O) volumes.
While Sebi has noted the concerns of the trading community, it is unlikely that it will revert to VWAP. This is because CAS was introduced to remove the drawback of VWAP, wherein large traders, institutional or non-institutional, with deep pockets were able to influence the closing price by manipulating prices of stocks having significant weightage in the index.
Secondly, CAS has not led to wild price swings in the cash market. Even in derivatives, volatility is more pronounced in the BSE Sensex than in the Nifty50, as the BSE Sensex has been comparatively less liquid.
Volume hit
Post CAS, the average daily option premium turnover on BSE dropped 26% month-on-month in August to ₹18,672 crore, compared with a 16% fall on NSE to ₹42,332 crore.
Why is average daily option premium turnover crucial? Well, transaction charges are BSE’s largest revenue stream, contributing nearly 78% in the June quarter (Q1FY27). Within transaction charges, options contribute as much as 95%, with the remaining coming from the cash segment. BSE does not charge for transactions in the futures segment.
So, if CAS is likely to stay with some modifications, particularly regarding the 3% price band, should BSE’s investors lose hope of a revival in average daily option premium turnover and, hence, transaction charges income?
Early recovery
Well, there is a glimmer of hope. Market participants, or traders, are getting accustomed to CAS if September’s initial trends are anything to go by. BSE’s average daily option premium turnover in the first four trading sessions this month has recovered sharply to ₹26,184 crore, or 40% higher than August.
Nonetheless, Q2FY27 transaction charges income could be lower than Q1FY27. As per Mint estimates, based on data for July, August and September so far, average daily option premium turnover is likely to be around ₹23,500 crore, or 21% lower q-o-q, even as it will be 57% higher year-on-year.
However, more trading days in Q2FY27—65 versus 60 in Q1FY27—would limit the drop in derivatives transaction charges to about 14%.
Pain priced in?
Investors seem to have priced in the short-term pain of lower transaction charges income, as BSE’s shares have already lost about 23% of their value from the 27 May peak of ₹4,446.8.
The average daily option premium turnover peaked out in April at ₹33,145 crore, after which it started sliding due to various issues such as higher STT, changes in bank guarantee norms for proprietary traders and CAS implementation.
The pressure on the stock was further accentuated as investors anticipated the opportunity to buy an alternative exchange play after rival NSE filed its DRHP on 17 June.
BSE’s price-to-earnings multiple is now at 43, based on FY27 Bloomberg consensus estimates.
BSE deserves a higher valuation multiple than other capital market plays, given the duopoly-like industry structure of stock exchanges. Plus, early indications from September numbers suggest that the bulk of the pain from CAS-related issues is behind it. That means further downside for the stock could be limited, unless new concerns emerge.