The Hindu Business Line : Manic October in F&O: A warning sign?

The monthly traded value in the derivative segment October was the highest ever, at Rs 18 lakh crore. In November, though, activity in the segment was more subdued, as action shifted to the small-cap sphere.

Lokeshwarri S.K.

The derivatives segment in the National Stock Exchange (NSE) broke many records in the manic month of October 2007 as investors were buffeted between twin emotions of greed and fear. The heightened activity in single-stock futures led to the NSE overtaking the Johannesburg Stock Exchange to become the exchange with the highest monthly turnover in this category of derivative instruments.

October 2007 would be indelible in the minds of most investors, as this was the period in which the Sensex raced breathlessly past 18000, 19000 and then 20000, in just one month. But there were also days of panic when the market watchdog, Securities and Exchanges Board of India (SEBI) clamped down on the money flowing into the market through offshore derivative investments. Trepidation about a large-scale exodus of funds following this ruling made the activity reach a crescendo in the days following the release of the discussion paper by SEBI.

New Records

It was in this period that former records of largest single-day turnover in various categories of the derivative segment were broken on the NSE. The exchange recorded the highest single-day turnover in index futures, index options and stock options on the day following the trading halt induced by a 10 per cent intra-day fall in the Sensex. Turnover in stock futures hit an all-time high on the settlement day of the October series.

Apart from single-day records, the monthly traded value in October too was the highest ever at Rs 18 lakh crore. This is a 71 per cent jump over the turnover recorded in September. Intra-day trading too appears to have picked up in this period since the daily average turnover witnessed a sizeable jump of 56 per cent over the previous month.

Increase in turnover in the derivatives segment is good for the capital market as it imparts additional liquidity and results in more efficient price discovery. But the pick-up in derivative activity while the market is whizzing sky-wards is not a positive sign as a good number of traders who enter at these levels would be novices who get lured by the notion of quick riches, possessing insufficient understanding of the risks associated with derivative instruments.

Force behind the frenzy

The monthly derivatives update released by NSE corroborates the view that retail investors stepped up their derivative activity in this month. Of the three categories into which this report classifies the investors, retail investors were the most active, with a 64 per cent share in the turnover. The proprietary accounts came next with a 25 per cent share, and institutional trades accounted for just 10 per cent. In other words, over 90 per cent of the turnover is largely speculative in nature.

The proportion of the retail investor’s contribution to the monthly turnover is more or less in line with that recorded over the last 12 months. But in absolute terms, the turnover in this category has almost doubled in just a month.

Dominance of Stock Futures

Another disturbing fact the report brings out, is the ascendancy of stock futures. Monthly traded value in this segment rose from Rs 670,968 crore in September to Rs 11,20,263 crore in October.

Since traders in Indian markets mainly play long with stock futures, increased trading in stock futures implies an increase in the bullish fervour, which is a negative if we see this from a contrarian standpoint. A sizeable portion of the turnover in stock futures was cornered by the Reliance trio, Reliance Industries, Reliance Communications and Reliance Energy.

Thankfully, November 2007 witnessed relatively muted derivative activity after the frenzy of October. Average turnover in the month was more sedate at Rs 69,000 crore.

The total turnover for the month of November fell short of that recorded in October. The subdued performance by the derivatives segment in November can probably be attributed the fact that the action shifted to the small-cap universe, where not many stocks have derivative instruments attached to them.

The road ahead

Investor confidence continues to run high despite weak global markets, subdued FII inflows and rich valuations in many sectors. As the froth settles in one segment, it starts building up in another. These are signs that the road ahead is not going to be smooth and investors should be ready to face turbulence in future.

More Stories on : Insight | Derivatives Markets

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page