More choice: The inclusion of futures on CNX IT Index and inclusion of such securities as IPCL, HCL Technologies, ONGC, Shipping Corporation of India and Wipro earlier this year has given market players more contracts to trade. The marked interest in banking stocks led to their inclusion in the list of eligible stocks for futures and options, which has enhanced the breadth of the derivatives market.

What stands out with such an expanded list is that there was sector plays in the derivatives market too. In the cash market, sectors such as banking, pharmaceutical and auto ancillary witnessed bouts of fancy followed by sluggishness. A similar trend has been evident in the derivatives market as well. For instance, on the announcement of interim dividend by oil companies and the approval for ONGC, Gail and Indian Oil to sell cross holdings led to heightened trading interest in the contracts on oil stocks in the past fortnight. This mirrored spot market trends where oil stocks spurted two weeks ago.

More liquidity on board: The bullish phase has attracted more players into the market, which has added depth. The level of participation from investors in non-metros has also increased compared to last year, which has further added to the liquidity in the contracts.

There may be room for further growth as, at present, institutional investors account for less than 2.5 per cent of derivative volumes. The rest is now contributed by arbitrageurs and day traders. If institutional participation increases, it may lend greater stability to price trends.

Compared to last year, when a high proportion of trading volumes were concentrated in a handful of contracts, such as Satyam Computers, Reliance, Infosys, Digital GlobalSoft and SBI, the trading interest this year has been more widespread. Contracts on stocks, such as ACC, Ranbaxy, Gujarat Ambuja, Tata Steel and Tata Motors, have witnessed hectic activity.

FII participation: Foreign institutional investors (FII) have been participants in the derivatives segment from the launch of the contracts. Nevertheless, what has brought about the high level of participation this year has been the bullish phase. Having taken positions in the cash market in select stocks up to the limit allowed, they have been using the derivatives market to take advantage in the stocks. In addition, due to the low cost of funds, FIIs have been actively arbitraging between the cash and derivatives market.

The increased activity of FIIs in the derivatives market is seen from their total gross market position in the derivative segment of NSE. This has risen from about 7 per cent in June to about 24 per cent in October. Due to the huge positions taken by the FIIs and many brokers in October, the NSE had to make margin calls. SEBI has now set a ceiling on the exposure limits in the stock futures and options. The exposure limits for index futures and options, however, remain unchanged.

Even after these restrictions, FIIs have continued to be active. Their current level of exposures is at some 15 per cent of the total market positions during November and December. This is still higher than previous year's levels.

Strict risk management measures: Following growing interest in the market, the NSE has kept pace with measures, such as higher exposure margins, reduced exposure limits, reduction in the securities allowed for meeting additional capital requirements and margin calls on high open positions. These measures have, however, not dampened the trading interest.

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