Sops gone, F&O volumes on BSE tanked in September

Derivatives volumes on BSE crashed once the exchange reduced the incentives it had been paying since January this year, exchange data for September show.

Small wonder, Asia’s oldest stock exchange has started doling out sops again this month to get the volumes back and plans to roll out an incentive scheme for Sensex options again.
In the last week of August, BSE had tightened the obligatory requirements for participating market makers so as to generate narrower-size spreads for quotes in index futures and options, and discourage non-serious players.

This change resulted in a 70% reduction in incentive payouts during September. As against an average Rs12.38 crore a month the exchange was paying as cash incentives to market makers and general market participants to trade in its derivatives segment since January this year, the payout in September was just Rs3.79 crore in September.

But this move also brought down its derivatives segment turnover by 61% — average daily trading volumes in September dropped to Rs15,795 crore from around Rs40,390 crore in the previous three months.

The exchange said its move was aimed at getting a bigger retail participation and genuine institutional investors. “Now that BSE has been able to capture sufficient market share and liquidity in the first phase with the help of arbitragers, proprietary traders and algorithmic traders, BSE and its members have been concentrating on gaining more participation from retail participants, FIIs and FIs,” said a BSE spokesperson.

But clearly, the loss of volumes was too much to bear.
The exchange has since amended its liquidity enhancement incentive programme (LEIPS) on BSE-100 index again. With effect from October 3, it has increased the incentives for passive orders in futures segment and has provided for higher incentive ceiling for out of the money options (OTM 2, OTM3 & OTM4) than for in the money or at the money options.

This has led to daily derivatives volumes improving once again, with Rs33,120 crore turnover recorded just on Wednesday.
As per latest BSE data, most of the open interest for BSE 100 index is for 5900 call, 6000 call and 5400 put, while the BSE 100 spot index trades at 5671.

But experts believe the volumes are still proprietary and incentive driven and it may be some time before serious investors will consider trading in the segment. “Low trading costs and good incentive structure are some of the benefits that BSE offers which has led to interest among brokerages. Though liquidity on the BSE derivatives has seen an improvement in recent months on back of market making, it is difficult to take a call on trading from the clients’ perspective as option interest is still not that high and one cannot judge how it will be once market makers move out,” said Nitin Murarka, head of derivatives at SMC Global securities.

According to BSE data, nearly 90% of the total derivatives turnover in the last month-and-a-half has been contributed by proprietary trades. Also, these proprietary traders, or market makers, have been shifting focus to different products based on changes in the incentive schemes.

For instance, the discontinuance of LEIPS on Sensex options from July 31 saw entire volumes shifting to BSE 100 options on which the new scheme was based. According to statistics on the BSE website, there is hardly any trading or open interest in Sensex options.

BSE believes open interest in its derivatives segment has been rising, though experts believe otherwise. According to its spokesperson, open interest has been consistently higher than Rs3,000 crore over a long period of 3-4 months and is slowly increasing as more and more retail participation is coming into the BSE derivatives.

Increase in open interest is considered a pointer to increasing depth, but experts say this calls for some analysis.
“While BSE has been pushing the segment and its brand aggressively by coming out with advertisements and investor education programmes, its still market making driven and nobody is asking for it as yet. Also, the open interest does not give a true picture because most of it could be in out of the money index options,” said the head of derivatives at a large predominantly retail domestic brokerage house.

In order to gain further trading volumes, BSE is reintroducing its incentive scheme on Sensex options, but with tighter spread-size obligations. “We have announced to bring back the LEIPS-VII scheme on Sensex Options again from October 29, 2012 in parallel with the BSE-100 options, which will help us in further increasing participation from the market,” said the BSE spokesperson.