After years of negligible share in equity futures and options, the Bombay Stock Exchange’s efforts are finally paying off. It now enjoys a 20 per cent market share in this segment.
In September last year, the BSE launched the liquidity enhancement scheme (LES) — a broker incentive scheme designed to prompt them into acting as the counterparty to an investor.
The share of BSE in derivative market was less than one per cent prior to the launch of LES with its rival, the National Stock Exchange enjoying a free run in the segment. Since the launch of the scheme, turnover has soared with the exchange accounting for almost 40 per cent of the market volume in some sessions.
Under the scheme, the exchange entered into agreements with brokers to provide quotes (market-making) for instruments traded in the derivative segment through the trading session. These brokers are paid daily cash incentives based on their trading volumes, open interest and number of quotes provided. .
The exchange is running up a large bill in thus bumping up the futures and options turnover. A sum of Rs 60.5 crore was paid as incentive in FY2012. This is 18 per cent of the gross profit earned in that period. The exchange paid Rs 12.5 crore for volume and open interest based incentive this June alone.
When asked about this outgo, a senior official of BSE said the exchange can afford to incur this expense and it was an imperative at this juncture.
With MCX-SX getting permission to launch trading in equity derivatives, it is important for the BSE to get a foot in the door, fast. Options currently account for more than 95 per cent of the turnover on BSE with Sensex futures accounting for the rest. Average daily turnover in July was around Rs 21,000 crore. It reached a record high of Rs 71,000 crore on Friday.
Naysayers point out that retail participation in the futures and options segment appears to be low with the segment dominated by brokers trading through their proprietary book (own trading account).
However, some market experts are of the opinion that the growing volumes are now beginning to attract retail interest.
“Though the trading interest has not surfaced so far among investors in BSE derivatives segment, we see that many traders are keeping a close eye on how volumes are shaping up on a daily basis,” says Mr Siddarth Bhamre, Head Equity Derivatives , Angel Broking.
“People have started asking for rates of Sensex future and going forward their participation would increase. As of now institutions are not active in Sensex options, once they start participating, depth would increase substantially,” says Mr Rikesh Parikh, Vice-President, Equities, Motilal Oswal
The moot question now is whether this level of turnover will be sustained if the incentive scheme is stopped.
“Any new product needs some form of market making in its initial stages and the current turnover is primarily due to the liquidity enhancement scheme. But if BSE markets its products well and spreads awareness that trading on BSE platform is cheaper than other alternatives then we may see turnover sustaining,” says Mr Bhamre.
“Participants measure the depth of market by its open interest and not really by volume. Once these parameters are taken care of, then there is a high probability that volumes on BSE derivatives platform will sustain even after current incentives are stopped,” he adds.