Moneycontrol Pro Panorama | Can BSE attract derivative traders?

With a change of guard, the BSE is hoping to revive the derivatives segment.

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NSE is synonymous with derivative trading in India. India’s oldest stock exchange —BSE Ltd has repeatedly tried to break the stranglehold of NSE on derivative markets but has never succeeded.

With a change of guard at BSE the recently appointed Managing Director and CEO Sundararaman Ramamurthy is hoping to revive the derivatives segment.

The general approach taken by the exchange for more than two decades was to bring in market makers and then hope that participants join in. Unfortunately, derivative traders did not go to BSE and stuck to the more liquid NSE.

This time around Ramamurthy has a different plan. He has introduced new products, changed the expiry days, and reduced the tick size in the cash market.

Reducing the tick size to just 1 paisa increases arbitrage opportunity. NSE has a tick size of 5 paise and so does the derivative segment in both BSE and NSE. This generates good arbitrage opportunities and will induce liquidity in the instrument. According to media reports, this change has already resulted in higher volumes.

But the most important change and one which participants are eagerly watching is the introduction of the Sensex and Bankex contracts with reduced lot sizes and different expiry dates.

BSE has reduced the lot size of Sensex from 15 to 10 and the Bankex index from 20 to 15. Contracts of these indices will expire on Fridays, instead of Thursdays earlier.

For NSE most of the derivative volume is in weekly options and that too on expiry days. Nifty and Bank Nifty contracts expire on Thursday while FinNifty contracts expire on Tuesdays. BSE, by shifting the expiry day to Friday hopes to capitalise on higher trading volumes on expiry day.

Further, the margin required for Sensex is also expected to be around Rs 70,000 as compared to around Rs 1 lakh for Nifty. Also, BSE has a lower cost of trading as transaction charges in the futures segment are zero on BSE while in options its charges are 90 percent lower than those of NSE. With the government recently increasing Security Transaction Tax, traders may consider shifting to a lower-cost exchange if the liquidity improves.

BSE has looked at most of the issues that a trader would like to see in an exchange, except one – liquidity. The big question is whether traders will come to the exchange, now that there is no liquidity enhancement programme by incentivising market makers. The exchange is approaching brokers and other stakeholders to participate in the derivative segment. These are still early days to judge the success of the segment.

Irrespective of the outcome, Ramamurthy’s effort of reviving a dead segment of the exchange is worth applauding.

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