The Hindu Business Line : Mini contracts to fuel speculation

Both the premier stock exchanges of India, the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), have lost no time in introducing smaller versions of the derivative contracts once the stock market regulator, SEBI, granted the permission to do so.

This speed is a reflection of the benefits that the exchanges expect to reap from the introduction of these products. The smaller contract sizes are expected to draw-in the investors who are on the periphery, possessing the desire to start trading in derivatives, but hesitating due to the high transaction cost and the initial outlay. Such investors would start trading in these mini contracts leading to higher turnover in the derivative segment.

Zooming prices

It is, however, debatable whether these mini contracts on Sensex and Nifty ought to have been introduced at this juncture when the retail investors and more importantly, novice traders are getting attracted to the bourses by the droves due to the zooming stock prices.

Many of these new comers do not understand the risks associated with derivative instruments sufficiently. Such investors ought to be deterred from trading in the markets at these levels and not facilitated for doing so.

Another reason why introduction of mini Sensex and mini Nifty does not seem to be a great idea because the margin requirements in the larger Nifty and Sensex futures or the premium in case of options was not really too high to start with.

Mini Contracts

Arbitrageurs and arbitrage funds can however trade the price differential between the larger contracts and the mini contracts. Portfolio hedging can also be done more precisely with the smaller sized contracts. This aspect would be beneficial to funds, HNIs and large operators.

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