How illiquid options are prone to manipulation

PALAK SHAH Mumbai | Updated on August 31, 2021

Options that swing 200-2,000% intraday contribute higher trading volume

Options in India’s stock market are highly illiquid and prone to price manipulation, data gathered by BusinessLine for three financial years (FYs) shows.

Options trading volumes on the National Stock Exchange (NSE) have grown to nearly ₹50 lakh crore during FY22, which was just around ₹8 lakh crore, three years ago. But the exponential volume growth is hugely built on intra-day price variation of 200 per cent to 2,000 per cent or more in a large number of options contracts, data shows.

The NSE has a monopoly in equity derivatives and trades three types of options contracts including monthly and weekly index options and monthly stock options.

Study shows that 75-80 per cent of the monthly stock options are traded for six days or less (the data excludes trading holidays). Such stock options have contributed 18-24 per cent of the turnover each year on the NSE with intra-day price variation ranging between 200 per cent and 2,000 per cent and more.

Price swings

Illiquid contracts make price manipulation easy and are a key reason for the wild price swings in NSE’s options segment. For instance, a put option of Bajaj Finserv (strike price ₹13,800) for the September month expiry saw 39,900-per cent intraday gains on August 27. On the same day, the call option of Bank Nifty index for September expiry (39,000 strike) rose 1,622 per cent.

Data for three FYs show that 68 per cent to 75 per cent of the monthly index options contracts were traded for five days or less. Yet for each FY, between 48 per cent and 65 per cent of the total turnover in NSE’s monthly index options segment came from a combination of contracts where price variation was seen between 200 per cent to 2,000 per cent or more and those which were traded for five or less trading days.

The NSE introduced weekly index options trading from February 11, 2019. In this segment, for all the three FYs, 96-98 per cent of contracts have traded for less than 5 trading days.

This despite the fact that each day, a minimum of seven different weekly expiry index options contracts are available for trading, including for further months. Further, for each FY, between 70 to 75 per cent of the turnover came from a combination of contracts where price variation was seen between 200 percent to 2,000 percent or more.

Weekly options

“If penny stocks move by 3 to 30 times in a year, there is a probe ordered for manipulation. But going by the data, options trading seems like an open field for price manipulators since it potentially generates artificial profit and loss to help tax evasion,” said an MD of a large Mumbai brokerage.

Turnover of weekly expiry options contracts far exceeded the monthly draw for all three FYs. It was in the ratio of 1:44 times, 2:58 times and 2:56 times.

Nearly 70 per cent of turnover (across all weekly, monthly expiries) in each of the three FYs came from contracts that were traded for less than 2 days.

Markets regulator SEBI and the Mumbai income tax department have been probing price variation and tax evasion through options trading, sources said.

Published on August 30, 2021

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