The recent hike in Securities Transaction Tax (STT) is starting to weigh on trading volumes in the most popular derivatives product: index options. Average daily premium turnover (ADPT) for index options—Nifty, Nifty Bank and Sensex—fell to a combined ₹90,044 crore across the NSE and BSE during the 16 trading sessions leading up to 25 May. Though market volatility remains higher than pre-war levels, it has started to moderate recently, joining the higher tax burden in dampening turnover.
While the May figure was 2.1% higher than the corresponding ADPT over 16 sessions in April, it was 13% below the combined ADPT of ₹1.04 trillion over 16 sessions in March, the last month before the 50% increase in STT to 0.15%, which took effect from 1 April.
‘Fear gauge’ India Vix, which measures the expected magnitude of price changes, averaged 21.29% in March, 20.44% in April, and 18.13% this month, significantly higher than the average of 14% over the past year.
Amit Chandra, senior vice president (research), HDFC Securities, said, "There has been a double whammy since April – majorly a hike in STT and a fall in volatility, which have impacted the combined volumes of both NSE and BSE from the pre-war level. Had STT remained unchanged, the turnover since March might have been higher than what it is.”
Indeed, average Vix levels, though higher than they were before the war, decreased by 4% month-on-month in April (from March) and by 15% in May so far amid growing hopes of a peace deal in West Asia.
Higher impact cost
"The hike in STT has raised the breakeven point for traders with the impact cost having gone up since April, leading to lower volumes," said Kruti Shah, quant analyst at Equirus Securities.
Impact cost is the cost of executing a transaction for a predefined order at a given point in time. The higher the impact cost the lower the liquidity, and vice versa. Breakeven point is the price above which a trader begins to profit.
NSE is the market leader in equity options, with a 72.2% market share in premium turnover as of the end of April. BSE accounted for the rest.
The government announced the STT hike in Union Budget FY27 to dissuade retail investors from punting on options. Sebi estimates 9 out of every 10 individual investors lose money trading derivatives.