Informist, Wednesday, Sep 27, 2023

By Rajesh Gajra

MUMBAI – The turnover in index futures and options on the National Stock Exchange is fast spreading to more than one or two indices, especially Nifty Financial Services and Nifty Midcap Select, leading to lower concentration in just two indices--the Nifty 50 and the Nifty Bank.

On the NSE, which dominates the equity derivatives market, the share of Nifty Financial Services in the total index derivatives turnover rose sharply to 18.7% in Apr-Aug compared to 7.1% in the whole of 2022-23 (Apr-Mar) and nil in 2021-22, data from the Securities and Exchange Board of India's monthly bulletins show.

Derivatives contracts of Nifty Financial Services index were introduced by NSE in January 2021.

At the same time, the turnover of Nifty Midcap Select derivatives, which was introduced in January 2022, has touched 1% in the current financial year from near zero in 2022-23.

This is no small feat, given the dominance of the Nifty 50 and Nifty Bank indices in the derivatives trading volume till a couple of years back. The Nifty 50's derivatives turnover share slid to 30% in Apr-Aug from 36.6% in 2022-23 and 41.1% in 2021-22, while that of the Nifty Bank declined to 50.3% from 56.4% in 2022-23 and 58.9% in 2021-22.

In the equity derivatives segment of the NSE, index contracts make up for 98% of the total turnover, with stock futures and options accounting for the rest.

THE WEEKLIES

The average daily equity derivatives turnover on NSE in Apr-Aug was 273.08 trln rupees, up by a substantial 78% from the full year's average in 2022-23.

According to derivatives market analysts, the bulk of equity derivatives trading takes place in the weekly options contracts on the four indices, and through the participation of individual retail traders and broker's proprietary books.

Foreign portfolio investors contributed 7.4% to the NSE's equity derivatives turnover in 2022-23, but their share has declined to 6% in Apr-Aug, SEBI data shows. Further, broker's proprietary trades made up 58.2% in Apr-Aug, up from 53.2% in 2022-23, while non-institutional non-proprietary traders, largely individual, contributed 35.8% in Apr-Aug, down from 39.4%.

According to Sahaj Agrawal, head of research-derivatives at Kotak Securities, weekly contracts give traders and investors opportunities to take a view for the short term and trade in open or risk-defined trades, depending on their risk appetite. "Derivatives expiry trading, where most of the volumes are coming in from attracts a lot of traders not just in Indian market but in global markets too," he said.

On NSE, except for Fridays, weekly index options' expiry takes place on all trading days. Nifty Midcap Select index weekly options expire on Mondays, followed by Nifty Financial Services on Tuesday, Nifty Bank on Wednesdays, and Nifty 50 on Thursdays. On Fridays, the BSE has the expiry of its Sensex futures and options, where the trading volume has jumped exponentially as well in the last four months.

"There is growing interest amongst the investors and traders who really want to trade on the shortest duration possible in the market on account of volatile premium movements and these generally happen to be at the expirations that are every day in the markets currently," Ashwin Ramani, derivatives analyst at SAMCO Securities said. The zero-day options appeal to retail traders as this gives them the opportunity to speculate with small capital with the availability of cheap option premiums, Ramani said.

THE REDISTRIBUTION

The new trend in index derivatives turnover is, therefore, largely driven by the propensity of options traders to limit their risk capital and yet garner the most leverage. It has inevitably led to a redistribution of the share each index commanded in the total index derivatives turnover.

This is, so far, visible on the NSE, but not on the BSE. In the latter's case, almost all equity derivatives turnover is concentrated in Sensex derivatives, even though it is trying to get its brokers and their clients to dabble in Bankex options.

The equity derivatives market has grown with some redistribution of focus on indices, according to Agrawal. Nifty Bank and Nifty Financial Services have higher beta and hence command higher premiums in options trading, which then makes them far more attractive for the trading community, he said.

Changes in the volatility of indices, therefore, play a key role in trading interest in index derivatives. "In recent months, implied volatility (in the Nifty 50) has been on the lower side, making Nifty 50 options trades less attractive, as compared to BankNifty (Nifty Bank) and FinNifty (Nifty Financial Services) where premiums are relatively better off due to higher beta factor," Agrawal said.

The trend will likely sustain in the medium term. According to Ramani, as the pace of trading activity picks up in Nifty Midcap Select and Nifty Financial Services derivatives, the volumes will increase further. He believes that the appeal of "zero-day options" to retail traders giving them the opportunity to speculate with small capital will continue to be there, and which will drive the volume.

The NSE also has the choice of adding indices such as the Nifty IT to the index derivatives mix to sustain high volumes. In fact, the exchange had introduced equity derivatives contracts in a few indices in the past but discontinued them after seeing little or no trading interest. For instance, the exchange discontinued derivatives contracts on Nifty CPSE, Nifty PSE, Nifty Infra, and India Vix indices in October 2018. Prior to this, in July 2009, it had discontinued derivatives trading in Nifty Junior (now called Nifty Next 50) and Nifty 100 indices.  End

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