F&O lot-size change spooks Dalal St

The Sensex slipped for the fourth session this week, ending the worst week of 2009 with a 199-point loss on Friday.

The BSE benchmark lost over 791 points for the week to close at 8843. The fall topped even the 650 point decline in the Sensex in the second week of January, after Raju’s revelations.

Besides a disappointing interim budget and continuing sales by foreign institutional investors, the week’s loss is also attributed to the change in lot sizes in the F&O contracts with effect from March.
NSE had in December announced significant changes in the lot sizes of contracts.

According to Sebi regulations, F&O contracts are required to be around Rs 2 lakh in value. Since most F&O stocks are trading at less than half their value, the number of shares per lot has increased significantly. So, traders holding F&O positions will need to pay additional margins for these extra shares.

In the current uncertain environment, traders are not ready to risk more money, say market watchers.

For example, Aban Offshore’s lot has been changed from 50 shares to 400 shares. Even large-cap scrips like HDFC, Reliance Industries have undergone significant changes in lot size. While Reliance’s lot size grew to 300 from 75 shares, HDFC’s lot size multiplied six times to 3096 shares.

“Investors who did not want to take the risk of putting in additional margin money in this volatile environment have squared off positions. That’s why we saw heavy volumes in the last week.
Nobody is ready to take the risk. If there is a big fall in the increased lot size, whatever little positions they had guarded over the past year or so, would be wiped off as bigger lot size means greater destruction when there is a fall,” says Harish Vasudevan of SVS Securities.

Average F&O volumes have risen to Rs 40,000 crore this week from around Rs 35,000 crore last week.

Shaky foreign investors due to uncertainties in the global economy are adding to market woes. FIIs have been net sellers all of this week, dropping Rs 1,500 crore. In doing so, they have been only continuing the trend that they have set in January, when they sold a net Rs 4,250 crore in the Indian markets. February has so far seen net sales of Rs 1,164 crore.