India has to show the way in futures

Sandeep Singal, co-head, institutional derivatives, Emkay Share and Stock Brokers, is a mechanical engineer turned wizard of high finance. Between 1996 and 2002, he was part of the core team at Bombay Stock Exchange that set up the derivatives market in India. “Hats off to the retail investors,” says Singal, pointing out that while the trend the world over is of institutions creating derivatives markets and serving them to retail, the market in India has been developed by retail investors and given to institutions. In fact, the first Rs 4,000 crore daily turnover was only on the back of retail investments, he says, adding, it was only in 2004, when the Rs 5,000 crore mark was crossed, that the real flows from FIIs started coming in. Singal spoke to Sanat Vallikappen and N Sundaresha Subramanian on a host of issue pertaining to the stock market, particularly derivatives. Excerpts:

What is your view on the introduction of Sensex futures in the US?
It’s a welcome step. My apprehension is that the experience of NSE listing its Nifty futures on Singapore exchange has not been very encouraging. The reason is that you need a market of unlike-minded people. You need people to buy and sell. In Singapore, mostly FIIs trade and they are like-minded people, I would say. Mostly block trade is reported instead of thorough liquidity. In India, a lot of retail investors and HNIs are pumping in the liquidity. In the absence of them, we had not seen the depth in these markets.

It seems the BSE has appointed some market makers to boost the volumes in Sensex futures. Will this help?
For last 8-9 months, the BSE is hovering around Rs 700-1,000 crore average volumes in Sensex Futures. There is concerted effort from the exchange by appointing some pseudo market makers, not market makers by regulation, to support the contracts. Retail interest is picking up. Lot of institutions also have now shown interest. There is an ETF launched on Hong Kong Stock Exchange on Sensex. There, Citibank is the market maker. With these products, they would like to hedge it back with Sensex futures. As and when, it catches the critical mass, there would be exponential growth. When that would happen is a difficult question to answer.

Anything significant you have observed in the last few months?
Generally, volumes used to be around Rs 55,000 crore. Three months ago, that level was crossed. Now, the volumes are typically around Rs 1 lakh crore. This was on the back of lot of liquidity and cash flows from FIIs. We are in uncharted territory now.

NSE has introduced lot of new stocks in the F&O space. Have they contributed to this increase in volumes?
In the new stocks that have been added, options are virtually illiquid. That is in line with illiquidity in stocks options. Stock options in general are illiquid, except a few like Reliance, Bhel and Infosys, etc. What I have seen in these counters, options get liquid towards the results season. Then people want to play on the volatility. The small caps or midcaps, there are very little volumes.

What about futures?
In futures, if you see them in relation to weightage of their market cap, they are contributing to their ability. Options, it is virtually zero.

Is it the same case with the new indices also?
The latest in the series is Midcap 50. Apart from Nifty, now there are five secondary indices. Their volumes are dismal. World over, people have tried and have not been successful. Similar experience was with single stock futures. India was the 9th country to launch single stock futures. Out of the eight that have launched before, seven have been failures. Only the Sydney stock exchange has seen some success and the stock exchange in Sweden has seen some action. I would say single stock futures and the secondary indices, India has to show the way to the world.

In that context, how do you see the latest Sebi move introduce new derivative products?
This is a very welcome step. I see long dated options, particularly with six months to one year maturity, happening immediately. Mini contract could be another success. But there, they would have to revisit the floor limit of Rs 2 lakh that was mandated at the time of launch of derivatives in 2002 for launch of Rs 1 lakh or Rs 50,000 kind of contracts.

A volatility index has also been proposed. With the option volumes low, will the calculation be difficult?
This problem was faced by CBOE also. Initially, they will manage with one month liquidity. At-the-money options are pretty liquid in India. Any variable of volatility index in India calculated on one month contract will express a one month view. Fine, it’s better to have some sentiment indicator than nothing at all.

Any sector you like at the moment?
Power is the best. Refineries, steel also look good. But these are largely commodity plays. One has to closely track the prices to take a view. Power is a more sacrosanct theme. It is not going to decline in one year or five years.