BSE set to launch new derivative product to de-risk arbitrage

With a view to de-risk arbitrage between the future and cash segments of stock, the Bombay Stock Exchange (BSE) will soon launch a new derivative product, ‘cash-future spread’ (CFS).

The trial runs for this product, the first of its kind, will start from August 1. CFS will be in operation from August 6 and will be made available for all stocks in BSE’s derivative segment, a top official said here.

“Having a single product for cash-future trade that eliminates execution risk has an interesting outcome for investors by offering them an interest rate type of product. It will be launched on August 6,” BSE Interim CEO, Mr Ashishkumar Chauhan, told PTI.

Mr Chauhan was here for a road-show ahead of the launch.

“Currently, it is usually done by way of doing cash and future trades separately, but there is a sort of an execution risk there when you trade in such a way,” he said.

The cash leg of the trade under CFS will be settled by delivery on T+2 days, as prevalent now. The futures leg, if open till expiry, will be settled by delivery on the expiry +3 days, an official statement said.

“When the stock markets are not doing so well, the interest rate products end up going up...CFS product, we can see a lot of demand coming,” Mr Chauhan said.

Currently, those wanting to take advantage of the spread between cash and futures have to enter four different trades — they buy in futures and sell in cash and then reverse the trade to square off the position, he said.

Cash futures arbitrage is a combination of a short/long position in an asset such as a stock and its future contract, which seeks to exploit pricing inefficiencies for the same underlying stock in the cash (or spot) and futures markets in order to make risk-less profits.

A trader who is long on cash and short on the underlying future, can make an early pay-in of shares (given that he receives on two day after transaction) and ensure that almost no margins are blocked against his open futures position until expiry, an official said.

In the cash market segment, BSE’s transaction volume had come down as a percentage of value, closer to 15 per cent or so in April-May 2012, but slowly it is inching up.

The loss of market share has been stalled and it is close to 18 per cent now, Mr Chauhan said, adding that in the derivative segment, “where we had no volumes last year, we now have achieved 30-35 per cent market share”.

The trading volumes of exchanges in India have come down by 50 per cent in the last three years, indicating a bear market, according to industry experts.

The BSE market cap stands at $1.2 trillion and it ranks ninth in the world, Mr Chauhan said.

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