Stockbrokers see revenue fall by up to 20% as the Securities and Exchange Board of India's (Sebi) new closing-price mechanism weighs on futures and options (F&O) trading income, according to industry executives.
Since its 3 August debut, the new framework has wiped out about half of the trading volume and value in Bank Nifty futures, according to a Mint analysis of National Stock Exchange (NSE) data.
As of 31 August, Bank Nifty futures volumes had fallen about 41% to 14,484 contracts, while traded value declined by a similar 41% to ₹2,512.95 crore. Nifty futures volumes fell 8% to 51,118 contracts, while traded value dropped 9% to ₹8,056.79 crore.
Since a significant portion of stockbrokers' income is tied to trading activity, they may see their revenue decline by 15-20% due to lower F&O volumes, said Nilesh Sharma, executive director and president at Samco Securities. As trading volumes decline, brokerage income is expected to fall proportionately, he said.
The revenue impact, however, could vary depending on a brokerage’s business mix.
The implications of weaker derivatives activity extend beyond brokerage revenues. F&O markets provide liquidity, helping investors enter and exit positions while contributing to price discovery across the broader market.
“The fall in F&O volumes is certainly not positive for market sentiment,” said Raj Shah, executive director at EPP Securities. “A sustained decline in volumes could reduce liquidity and impact the overall market ecosystem.”
A cause for uncertainty
The closing auction session (CAS) determines the closing price of stocks through a single equilibrium-price auction, replacing the final volume-weighted average price (VWAP). As of now, the new mechanism applies to 213 derivative-traded stocks and has altered activity in the F&O market.
Regular cash-market trading ends at 3:15pm, after which the auction begins at 3:20pm. The auction closes at a random time between 3:28pm and 3:30pm, followed by order matching until 3:35pm. The closing price is set at the level where the maximum number of buy and sell orders can be matched.
But sharp price movements during the final moments have caused uncertainty. On 26 August, the Nifty slumped 271.4 points within 30 seconds after the auction order session opened at 3:20pm, falling to 24,005.5 from the reference rate of 24,276.9 released at 3:15pm. It later recovered, closing at 24,207.75, 0.28% below the reference rate by 3:30pm.
Mint reported that the movement could be attributed to a bid placed 3% below Bharti Airtel's reference rate. While the order was within the market regulator's permitted range, participants were puzzled as to why it went through.
A similar episode occurred on 3 August when the Nifty surged 1.6%, while the Sensex gained only 0.7%, creating an unusually wide divergence between the two benchmark indices. The Nifty also saw a nearly 200-point surge in the final two minutes of order closing, creating a gap between the index, its underlying stocks and their futures.
These episodes have made it harder for market participants to predict where stock prices will settle during the auction, reducing incentives for derivatives trading.
The concern is not limited to futures. Mint reported on 10 August that Nifty 50 weekly index options, which expire every Tuesday, also saw lower participation in the first week following the CAS's introduction. Call-option purchases fell 16% to 151.9 million contracts on 4 August from the 180.6 million contracts traded on 28 July, while put-option purchases declined 10%, as thin participation in the closing auction weighed on F&O activity.
Call-option purchase volumes on the other Tuesdays in July ranged between 167.13 million and 183.2 million contracts, while put-option volumes swung between 164 million and 207 million contracts.
NSE had a market share of 99.7% in equity futures and 69.4% in equity options as of 30 June, according to exchange data.
A bitter pill
A former regulatory official expects the CAS to decrease volatility over time, “which has been proven by its introduction in several other markets across the globe”.
“With regards to the F&O volumes, Sebi has made it clear since the beginning that it does not want such high volumes in the segment. Derivatives are useful for price discovery, market liquidity and market depth, but if it is done in tenor, not if it is done the same day for three minutes on expiry day,” said the official on the condition of anonymity.
The official, however, acknowledged that when Sebi was discussing the CAS, it did not anticipate that the system would have such a significant impact on the derivatives market.
Mint's queries emailed to Sebi on 1 September remained unanswered.
Meanwhile, brokerages that have a larger mix of derivatives see a revenue hit of about 10%, said Sandeep Chordia, chief operating officer at Kotak Securities. The extent of the impact, he added, would depend on whether Sebi tweaks the CAS. “If changes are made to the system that revive volumes in the derivatives segment, then there may be no hit to revenue.”
For brokerages, diversification could provide some cushion. “If the revenue is hit severely, then brokerages may look at focusing more on MTF (margin trading facility) or distribution of wealth products such as mutual funds to retain their income,” Chordia said.
Strategies alone may not fully offset the impact because the changes have affected both the broader market environment and the microstructure of the F&O segment, Shah said. “In fact, I would expect further reduction in F&O volumes going forward. We may have to adjust to a structurally different level of volumes."