Why exchange traded currency derivatives volumes slowed in 2023

Trading in exchange-traded currency derivatives (ETCD) slowed in 2023, the most since 2017.

Data from the Securities Exchange Board of India (SEBI) show that in the National Stock Exchange (NSE), 45,748-lakh crore contracts were traded last year. This is up just 6 per cent from 43,318-lakh crore contracts traded in 2022. It is also the slowest since 2017 — the year when volumes fell by 2 per cent.

The turnover volume in 2023 was ₹379.53-lakh crore. This was just a 10 per cent rise from ₹344.22-lakh crore seen in 2022. This was also the lowest since 2017 when the turnover volume dropped by 6 per cent.

The major reason for the slowdown in the volume was the low volatility. Anindya Banerjee, Vice-President, Currency Derivatives Research, Kotak Securities, says: “The volatility in 2023 primarily was the lowest since 2002 which has caused the volumes to come down.”

The trading range (spread between high and low) for the whole year was just ₹2.57, the lowest since 2002. The spread in the first quarter of the calendar year 2023 was ₹2. But that narrowed to ₹1.24 and ₹1.6 in the second and third quarter, respectively. In the final quarter of 2023, the spread was just ₹0.55.

Hedgers stay out

The research head of a leading institution, who did not want to be named, said that the trading volume from corporates that ideally use the exchange traded derivatives for hedging had come down drastically last year. He said corporates contribute about 7 per cent of the total trading volume on average. That had come down to about 4 per cent.

According to Vikrant Sharma, Founder and Fund Manager, Kushak Capital Management, low premium and high cost had kept the hedgers out of currency derivatives last year. “Hedging happens majorly on the exports side. Low forward premium and low volatility made the exporters to keep their exposures unhedged. Low interest rate differentials, too, did not give any incentive for them to hedge ”.

Traders’ take

According to experts, about 20 per cent of the trading volume in currency derivatives comes from the retail traders. Narrow range movement, high cost, low option premiums have reduced their participation. Manish Maisheri, an independent currency trader, says, “My trading volume in rupee reduced to 2 per cent of my total trades last year. Earlier, it used to be 30-40 per cent.”

Alternatively, Manish Maisheri, had increased his trading volume in other currencies such as the euro, pound and even in index derivatives. Another trader, who did not want to be named, said that he shifted about 60 per cent of his capital from currencies majorly into equities and to some extent in commodities.

Increase in trading cost coupled with low volatility was also another reason for traders to stay away from the currencies.

Last year the Securities Transaction Tax (STT) was increased on the sell side of Futures and Options. from 0.01 per cent to 0.0125 per cent. For options, the increase was from 0.017 per cent to 0.021 per cent.

“Considering the cost, a trader will not prefer to be in a place where there is a tight trading range. Rather he would shift to assets such as equities that had good volatility last year,” adds Vikrant.

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