Newcomer frenzy in options market worrisome: NSE chief Chauhan

Ashishkumar Chauhan, MD and CEO of NSE. (Photo: PTI)
Ashishkumar Chauhan, MD and CEO of NSE. (Photo: PTI)


  • Ashishkumar Chauhan, MD and CEO of NSE, terms the fetish for derivatives, particularly options, among new investors ‘worrisome’. He said newcomers should focus on long-term investment instead of dabbling in derivatives.

Mumbai: Newcomers to the equities market should focus on long-term investment instead of dabbling in derivatives, especially if they lack the expertise in trading on futures and options (F&O), said Ashishkumar Chauhan, MD and CEO of NSE.

However, he said in the same vein that while the notional turnover of options seemed to suggest very large trading interest, the premium turnover had not varied as much daily, implying that the number of participants had not shot up dramatically.

Terming the fetish for derivatives, particularly options, among new investors “worrisome," he said, “We should motivate new investors to go toward longer-term investments through the cash segment of the exchanges and if they don’t have the expertise (for derivatives) they should be on the cash segment all the time," he said on the sidelines of the muhurat trading on Sunday. “Trading tends to be focused in the last half hour or last two hours on the expiry day of the options and although it may look like you’re trading a lot on a notional basis, the premium turnover is not varying as much daily."

Notional turnover is a product of the contract unit and its current price, while premium turnover is the price at which the contract can be actually purchased and sold in the market, or the market value. It is the product of premium and the contract unit.

In the case of index options (Nifty and Bank Nifty mainly) the notional turnover so far this fiscal year stands at 42,977 trillion while the premium turnover is 79.24 trillion or just 0.18% of the notional turnover.

Buyers of an option have to pay sellers a premium to be able to purchase or sell an underlier like Nifty or Bank Nifty, which are cash-settled contracts.

While the notional turnover of index options rose by 15% so far this fiscal year from the whole of FY23, the premium turnover is still lower by 28% from that in FY23.

“Broadly speaking, we have not seen a large increase in the number of people trading derivatives. We have seen more or less consistent numbers of participants, which is 35-40 lakh in any quarter in the last three years." He also said that while those trading options might be categorized as small investors, they might be day traders and experts and not just a lot of newcomers.

“Today, we might not be able to find out the difference between who is a day trader, an expert and who is a newcomer and those are the things we should be able to put in place at some point of time to separate and differentiate in terms of statistics."

His comments come against the backdrop of Sebi mandating that each contract note issued by brokers run a set of disclaimers to caution retail investors about the pitfalls of derivatives trading, one such being that nine out of ten traders in options lose money.

On the listing of NSE , Chauhan said the exchange was awaiting Sebi approval for the same which it had sought months ago. As a systemically important market infrastructure institution, exchanges wanting to apply for a listing have to first seek Sebi permission before filing their papers with it.

“In a way, once Sebi tells us when they are comfortable, that is the time we will apply. We have not heard from them over the last six to eight months. The way we look at it is that there have been issues in terms of overall things that happened at NSE. So, once Sebi feels comfortable they will tell us that and we will apply for the IPO," he said, referring obliquely to the co-location scam that surfaced eight years ago under a previous management.

He also said the exchange hadn’t received any feedback yet from Sebi on its proposal for increasing trade timings on derivatives. The current market runs from 9:15 am to 15:30pm.

On market sentiment, he said that the recent cooling-off in US treasury bills suggests that US markets are pricing in Fed holding rates rather than raising them in upcoming policy meets, which could once again result in the risk-on sentiment among FIIs and inflows into emerging markets.

Though FPIs have net-purchased Indian shares worth 1.16 trillion so far this fiscal year, they have net-sold shares worth 45122 crore in the last three months through Diwali.

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