India's derivatives to cash market turnover ratio at highest among world markets

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India has raced ahead of Korea Exchange, in terms of the ratio of equity derivatives turnover to the cash market turnover, according to data by World Federation of Exchanges Forum. The derivatives to cash market ratio for India has increased to 29.6 from around 15.0 two years ago, and is way ahead of Korea, which had a ratio of 18.8 at the end of March 2018.

As per the forum, March data shows that NSE cash market volume stands at USD 90,968.9 million and derivatives volume at USD 2,689,055 million dollars. Cash volumes for the Korea exchange were USD 240,760 million while derivative volume was at USD 4,529,445.1 million.

A discussion paper on the development of equity derivatives had recently raised concern over the high ratio of derivatives to cash following which the Securities and Exchanges Board of India (SEBI) had proposed introduction of physical delivery for single stock futures and options in a phased manner. SEBI also recently tightened margin requirements for trades in the futures and options segment.

Brokers say these measures will help curb speculation in the derivatives market, particularly by retail investors with little or no understanding of the product.

“When retail investors lose big money, most of them never return, and that hurts the economy in some way,” said a broker who did not want to be named.

“In India there are around 3 crore demat accounts but the active demat account are much lesser. The policy should be pro-investment rather than to trading activity,” the broker said.

SEBI also believes the derivatives market is for informed investor and not for retail investors with networth of less than Rs 2 lakh. To ensure those with lower networth do not trade in derivatives, the regulator made it mandatory for anyone wanting to trade in derivatives to furnish bank statement for six months.