F&O exclusions hit sentiment; expect volatility: MF Global

Anshul Bhargava, head of institutional derivative research at MF Global, attributes the depression in several F&O counters today to the exclusion of 51 stocks from the segment by the NSE. He believes this decision has adversely impacted sentiment, and could cause some volatility going forward.

“Many of these stocks may see little bit of volatility around the time when these names will exit the Futures and Options segment,” he said. The SEBI yesterday tightened the norms for those companies entering the F&O space, hence removing these 51 companies. Below is an edited transcript of his interview with Udayan Mukherjee. Q: Is today’s reaction a sentimental one because you do have a couple of more series to adjust any of the open interest in those 51 scrips? A: This is more of sentimental effect that is there on the market. As per the circular, the positions can be carried forward for another two months after which the contract on these 51 names will not be available. Q: Do you think significant adjustments need to be made given the profile of these stocks and the kind of outstanding interest that you see here? A: Our analysis indicates that on whole the open interest on these 51 stocks is not more than 8% of the single stock futures open interest. That clearly indicates that the market as a whole will not see a significant impact. However, many of these stocks may see little bit of volatility around the time when these names will exit the Futures and Options segment. Q: How did you read the criteria which had been put out by the NSE a couple of days back? According to it, do you expect progressively more and more stocks in passing series to be weeded out? A: Yes, what SEBI has done is make the entry criteria much stricter. So for a new stock to come into F&O segment, it will have to have much more liquidity, it will have to have a much more higher market wide position limit number. So lesser and lesser new stocks will come into the F&O under the new criteria. Amongst the existing stocks, if the market does go down, then as the prices come down the criteria to meet it will become much more difficult, especially for the smaller names. So if the market does come down we will definitely see more and more names coming out of the F&O list. Q: Do you see a lot of interest in many of these companies shifting to the cash segment now or delivery based segment? A: Partly yes, but what we have noticed is that names that have got F&O on them, the liquidity in both the cash and futures increases when they are in the F&O segment. New players may still look at in the cash segment, but there will be some loss on the cash side also.