NSE beats CME to be world’s top derivatives exchange," read a headline in a leading Indian newspaper this week. Indeed, numbers published by US-based Futures Industry Association (FIA) last week show that National Stock Exchange (NSE) topped the futures and options league table in volume terms. NSE’s derivatives volumes grew 57% to 5.96 billion contracts in 2019, while CME Group’s volume stood at 4.83 billion contracts.
While NSE’s march to the top of this league is noteworthy, it’s important to remember that the value of contracts on Indian exchanges is a fraction of that in the US and other developed markets. In value terms, India’s NSE is still far behind US counterparts such as CME and Intercontinental Exchange (ICE), data from World Federation of Exchanges (WFE) shows.
But turnover in value terms isn’t a great measure either, since exchanges such as CME trade certain interest rate futures contracts, which have an unusually large notional value, given the low underlying volatility of these contracts. “The ideal measure would be the margin that is posted with exchanges, since that would give a sense of the risk that is being transferred using an exchange’s platform. But this is difficult to measure," says J.R. Varma, professor of finance at Indian Institute of Management, Ahmedabad. Margin worth ₹1 crore, for instance, will enable a trader to take a much larger position in the currency futures market, where volatility is relatively low, as compared to equity futures, where volatility is higher.
One proxy that can be used to measure the relative size of the NSE vis-a-vis its US counterparts can be the revenues of these exchanges. After all, the proof of the pudding is how much revenue exchanges generate from all the trading and other related activity on their platforms.
NSE’s total revenues stood at $123 million in the quarter ended September 2019. In comparison, revenues of CME and ICE stood more than ten times higher at around $1.3 billion and $1.7 billion respectively. This excludes investment income and is before adjusting for transaction-based expenses such as rebates to brokers.
US-based Nasdaq reported revenues of about $1.1 billion, while Eurex’s revenues in the September quarter stood at around $850 million.
Closer home, in Asia, Singapore Exchange reported revenue of $248 million, double that of NSE, while Hong Kong Exchanges And Clearing’s revenues stood at around $390 million.
Of course, these include revenues from cash equities trading, listing and data services of exchanges, and hence may not be a perfect proxy for the level of derivatives activity. Still, it’s certainly far better than metrics such as volumes and notional value.
For perspective on the large difference between contract sizes, data collated by the WFE is helpful. About 70% of NSE’s total volume comes from equity index options. In the equity index options segment, the average size of contracts traded on NSE stood at about $9,500 in 2019. In contrast, they stood at $175,000 at CME, data from WFE shows.
Another measure some experts prefer to look at is the level of open interest, or outstanding positions on an exchange. As pointed out by Varma earlier, the key is to measure the amount of risk being transferred, and open interest on an exchange provides some clues on this count.
At CME, open interest in equity index options stood at 3.47 million contracts in December, which was 5.2 times its average daily volume during the month. In NSE’s case, open interest in the equity index options segment was merely 0.1 time its average daily volume.
Still, as pointed earlier, NSE’s feat of topping the volume league table is noteworthy. Ten years ago, NSE stood at seventh position in the FIA volume rankings. There has been steady growth; of course, as was the case 10 years ago, the gap between large global exchanges and NSE remains high in terms of revenues, open interest and notional turnover.