International brokerage Goldman Sachs cut its target price on shares of Asia's oldest bourse BSE Ltd. as the market regulator Securities and Exchange Board of India (SEBI)'s proposed changes on monitoring risk could reduce activity from proprietary traders.
Goldman Sachs trimmed its target price on BSE shares to Rs 4,880, from Rs 5,650 earlier, while maintaining its neutral rating. The broking house noted that around 70 percent of BSE's average daily turnover comes from proprietary traders.
The market regulator has proposed a new way to measure risk investors are exposed to, in a consultation paper issued on February 24.
In the consultation paper, the Securities and Exchange Board of India (SEBI) has proposed changing from the current method for computing open interest (OI) in equity derivatives from notional terms to a future-equivalent or delta-based approach.
OI is the total number of derivative contracts of an asset that are there in the market.
According to the regulator, these measures will reduce the potential manipulation and better align derivatives risk with the underlying cash market liquidity.
There is also a risk-management measure for the index-derivatives segment. A market expert said, "With this better measurement, the chances of entities running very large positions especially in index options while notionally showing low open interest would be dramatically reduced."
"Finally, this better measurement of risk along with suggested minimum conditions for construction of F&O indices should reduce the actual and perceived risk of any manipulation across cash and derivatives markets, and of excessive volatility."
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According to Goldman Sachs, this will lower the industry's options premium to cash equity turnover from 0.4x to 0.3x. As a result, the average daily premium traded for index options contract market share unlikely to exceed 30 percent, which was at 22 percent in February.
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