Derivative volumes up as market falls

There is an all-pervasive gloom in equity market since the beginning of this year as stock prices nose-dived. But do you know that traders are actually happy with this situation?

If the spike in derivative turnover in November last year and the first two months of this calendar year are anything to go by, traders appear to be making the most of the market volatility and declining stock prices.

A major portion of derivative transactions takes place on the National Stock Exchange (NSE).

The daily turnover on the NSE averaged Rs 1,44,000 crore in January and February. It was equally high in November 2010 when stock prices tumbled on the back of soaring inflation, policy rate hikes and numerous scams.

In contrast, the average monthly turnover was just Rs 95,000 crore between January and October last year. The daily volume in December 2010, when stock prices attempted to stabilise and even rallied slightly, was also much lower at Rs 1,07,000 crore.

The indecisive trend in the market in 2010 with the equity prices not making a clear move in either direction had kept traders on the edge till November.

There were also many among the market participants who were sceptical about the sustainability.

There appears to be relief among the trading fraternity as a clear trend emerged in the market, albeit downward, since this enabled traders to initiate positions with greater confidence.

Index options surge

Much of the surge in turnover was led by turnover in index options that implies that the mature traders are employing various strategies to make the most of market decline.

There is also a discernable decline in turnover in stock futures denoting that small traders with lower holding power are exiting the market.

While trading volume — as denoted by the turnover in futures and options — is up this year, cash volumes are on the descent.

Average daily cash volume on the NSE recorded a peak of around Rs 17,000 crore in October and November last year. This fell to Rs 13,300 crore in the first two months of this year, a drop of over 20 per cent.

On the BSE

Similar trend is seen in the volume on BSE too with average turnover declining from over Rs 5,000 crore in October and November last year to around Rs 3,400 crore in the first two months this year.

Larger presence of retail investors in cash segment has produced the trend of declining turnover that is more characteristic in market corrections.

As stock prices correct, smaller investors tend to retreat from stock market and even lose interest, leading to declining volumes.

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