The Hindu Business Line : `Retail investors wiser after the May 2006 experience'

Chennai June 18 The retail investors are flocking to the derivative segment, especially the stock futures in the National Stock Exchange. The situation is reminiscent of April 2006 when unbridled trading in the stock futures by retail investors exacerbated the fall in our markets.

With the open interest nearing all-time highs, we asked Mr Krishna Kumar Karwa, Managing Director, Emkay Share and Stock Brokers, about various aspects relating to the Indian equity derivatives.

What is the percentage of your turnover that comes from the derivatives?

Typically 75 per cent-80 per cent of market volumes are in derivatives and the balance is in the cash equity market. Of late, the overall market volumes are in the range of Rs 50,000 crore on a daily basis across all segments of the market.

Within the derivatives market, index futures and index options account for 40 per cent-45 per cent of the derivative volumes, with the balance being accounted for by stock futures. Options on index are actively traded. At Emkay, volumes across market segments are broadly on the same lines as the overall market.

Do you see the proportion of retail investors increasing in this section?

The equity derivatives markets enable retail investors to leverage with margins typically in the range of 25 per cent-35 per cent, so effectively getting 3 to 4 times leverage.

Today, we have 186 stocks in the stock futures segment. These stocks are typically the ones which are very active and which fulfil the criteria set by the regulatory authorities.

The ease of doing business in the stock futures segment with minimum impact cost, leverage, and the constant upgradation of scrips available in the derivative segment have seen increasing retail participation over a period of time.

The product is almost similar to the erstwhile vyaz badla system. Of course, buoyant market conditions will see greater retail participation as against bearish market conditions. Gradually, we are seeing retail traders increasingly participating in the index futures.

How is the mood among the retail participants in the current market when compared with the mood just before the May 2006 crash?

The rally in the last 3 months has been broad-based with good participation by mid-caps where typically retail investors are concentrated. Smart retail investors are cautiously positive — we have been advising them to keep regularly booking profits, stay away from penny stocks and participate in futures and options within manageable limits. The large IPOs have turned retail investors circumspect. Retail investors, I believe, have become wiser after the May 2006 experience.

What is your opinion on the NSE increasing the number of single stock futures? Do you not think that investors stand the risk of greater loss in stock futures vis-à-vis stock options?

There are well-defined guidelines for any stock to be eligible to be introduced in the stock futures segment. With strict margining, mark to market compliance, retail investor education by all intermediaries and regulatory authorities, I believe all efforts are being made to ensure that retail investors are aware of the risk before they participate in the Futures segment. Finally, equity is a risk, with leverage it will be more risky — this is a fact which I believe every retail investor understands.

Why is the trading in options so much lesser than the futures in the Indian markets?

Trading in index options has picked up with average daily volumes of approximately 4,000 crore What has languished is the stock options segment. I believe that gradually, with more familiarity, education and introduction of more longer dated options will lead to increased trading in the options segment. Stock Futures are akin to the vyaz badla system and the familiarity of investors with that product has seen stock futures being more actively traded versus stock options.

How has the interest in the BSE derivative segment been? Do you see the BSE derivative section catching up with NSE anytime soon? What in your opinion should the BSE do to narrow the gap?

BSE authorities have been conducting awareness campaigns and I am sure gradually volumes on the BSE derivative segment will pick up. Product differentiation will be the key to catch up.

Which segment of your company do you think will be the growth driver in the years ahead?

We, at Emkay, are well positioned to grow on both the cash and futures segment of the markets. We have a strong research-based advisory model which enables clients to make greater returns. Our focus is equally strong on the institutional and non-institutional clients.

The endeavour at Emkay is to offer all financial services including PMS, wealth management, research advisory, and mutual funds.

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