What is the BSE attempting to do with its derivatives segment and what measures has it taken to achieve that? What challenges does it face, and how do the market participants view its efforts?
BSE is attempting to revive its derivatives segment by relaunching the Sensex and Bankex futures and options contracts with reduced lot sizes and different expiry dates. The lot size for F&O contracts of the Sensex has been reduced to 10 from 15 earlier, while the lot size for futures and options contracts for Bankex index has been changed to 15, instead of 20 earlier. The contracts for both the indices will now expire on Fridays, instead of Thursdays earlier.
BSE has faced challenges in this area in the past, and market participants feel the odds are stacked against it this time as well. Currently, the NSE has a near-monopoly in equity futures and options with over 99 percent market share. The one big change now is that trading in options has risen to a frenzied scale in the last couple of years.
BSE is hoping to attract traders who are looking to trade options expiring on the same day or looking to play the Monday-Friday settlement cycle. The exchange is betting that by keeping a Friday expiry, it can attract traders who would prefer a Friday expiry, rather than a Thursday expiry, which is currently the norm at NSE. However, there is always the risk that NSE could shift the expiry of either Nifty Bank or Nifty to Friday at some point, if it senses a threat from BSE’s weekly options.
In the past, BSE’s credibility hit rock bottom in the wake of the 2001 stock market scam with broker Ketan Parekh at the centre of it. Moreover, registration approvals for BSE members were slow in coming, and most brokers started applying for registrations on their NSE memberships. Once NSE took the lead in derivatives, the gap quickly widened to the point where BSE’s presence was negligible.
In the recent past, BSE introduced the Liquidity Enhancement Incentive Programme (LEIP) to boost volumes in its derivatives segment, but the scheme failed to move the needle for BSE’s derivative segment. Last year, the BSE was paying out around Rs 1.5-2.0 crore a month to market markets in the derivative segment. Effective April, LEIP has been scrapped altogether. As this report shows, NSE is estimated to have paid up to Rs 1,000 crore or even more, by way of rebates to its trading members in FY23.
Therefore, to bet that an army of option traders will flock to BSE just because that is the only game in town on a Friday is a big leap of faith. While liquidity can be a virtuous cycle, lack of liquidity will lead to even more illiquidity.