After index play, BSE may look to breathe life into stock derivatives

After finding its feet in index derivatives, the country’s oldest bourse BSE, is gearing up to dip its toes in stock derivatives.

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“Stock options and futures are very much on our radar,” the bourse’s Managing Director and CEO Sundararaman Ramamurthy told businessline. “But we want to stabilise our Sensex and Bankex derivatives offerings first, before we embark on working on these segments.”

The exchange has not officially set a timeline or spelt out a gameplan for stock derivatives, where it has little to no turnover currently. Its immediate goal is to ramp up institutional participation in index derivatives instead.

“Currently, we have 60 foreign portfolio investors trading Sensex derivatives; many more can trade on this segment. We are also revamping our colocation facilities, which will help boost volumes in both the cash and derivatives segments,” Ramamurthy said.

While the exchange insists, that any product launch or revamp, will be dictated by market needs and member requirements, the buzz on the street, is that there has been a nudge from the market regulator to look at the segment.

An email sent to SEBI, did not immediately get a response.

BSE relaunched its weekly Sensex options product last year, with a Friday expiry. Bankex expiry was shifted to Monday. Within months, BSE has wrested a 13 per cent market share, in notional turnover in index derivatives. This is expected to climb and stabilize at 18-20 per cent in the coming months, according to analysts.

Shoring up volumes in stock derivatives, may be a lot harder, given the problem of higher volatility and lower depth.

“The segment may have large holders of stocks who influence prices either way. Only evolved traders dabble in stock derivatives -- either those who are well-informed or those who are long-term holders with a definite view,” said Deepak Jasani, Head - Retail Research, HDFC Securities.

Rival NSE, currently offers over 180 stocks in index derivatives, but BSE may offer a much lower number to begin with, said market watchers. It remains to be seen, if BSE will offer any incentives to members for trading in stock derivatives, considering that the exchange has stopped doing so, in the index derivatives segment.

“It will not be easy to make inroads in the stock F&O segment, unless there’s enough differentiation. This could be in the form of weekly or fortnightly expiry contracts or options on options, a second-order derivatives product sold in the US,” said Rahul Sharma, Director & Head - Technical & Derivatives Research, JM Financial Services.

Average daily turnover of stock futures, for December at NSE, stood at ₹1.26 lakh crore, while that for stock options at ₹9,016 crore.

Kickstarting the stock derivatives segment, may well take a year or more, according to Alok Churiwala, a stock broker.

“Sensex and Bankex derivatives trading, has attained critical mass and become commercially viable. Higher foreign participation will bring in bulk buyers and sellers. The regulator, too, has hinted, it is in favour of having two strong exchanges and not lopsided competition. All this bodes well for BSE,” he said.

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“More competition will eventually help in shoring up market volumes, bring in wider participation and provide arbitrage opportunities for traders,” added Sharma.

BSE shares have surged 407 per cent in the past year.

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