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BSE-100 derivatives to take on Nifty-50

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Competition among stock exchanges is rising, ahead of the launch of MCX-SX. To make its derivatives segment more attractive, the Bombay Stock Exchange (BSE) has decided to take on the country’s most popular financial product, the index of the rival National Stock Exchange (NSE).

is launching derivatives for the BSE 100 index, which market players say is being pitched against the Nifty. The cost of trading the BSE 100 will be lower than the NSE’s index.

Trading in equity indices contributes nearly 80 per cent to the derivative market in India, where average daily trading volumes are about Rs 125,000 crore. In this, the Nifty index has a lion’s share, with Rs 80,000 crore worth of contracts traded daily, on an average. Of late, trading in Sensex derivatives has gained traction on the back of a market making scheme that the exchange has launched and the index sees volumes of Rs 30,000-50,000 crore.

So, why is it that BSE expects its 100-share index to become as popular as the Nifty? According to exchange officials, the key point is that the BSE 100 index has a 99.4 per cent correlation (coefficient of variation is 0.994) with the Nifty, and both indices are trading at nearly the same levels. On Tuesday, the Nifty closed at 5,128, while the BSE 100 was at 5,147.

Also, the BSE 100 has 99.4 per cent correlation with the (Morgan Stanley Capital International) India Index, widely tracked by foreign institutional investors. While the Nifty stocks represent about 65 per cent of the free-float market capitalisation on the NSE, the BSE 100 represents a little over 70 per cent of it on the BSE. With all this, market players will be able to trade at a lower cost than that of the Nifty index and yet not find it a lot different from trading in the Nifty.

Options trading in index derivatives generate 95 per cent of volumes on both and BSE. On BSE, the cost of transaction will be 99 per cent lower for trading in the BSE 100 index options than that of NSE’s Nifty.

The NSE charges Rs 5,000 for every Rs 1 crore of options turnover while BSE will charge a measly Rs 50 for the same. The exchange is already doing it for Sensex options and by now extending it to the BSE 100, closely correlated to the Nifty, it would make it difficult for traders to refuse to trade the former broader index, said a Mumbai-based broker. Moreover, the BSE 100 index would be put under the market making scheme for the first six months, ensuring that traders also cut on high statutory costs initially.

Trading in the Nifty index comprises exchange-traded funds (onshore and offshore), exchange-traded futures and options (at NSE, the Singapore Stock Exchange and the Chicago Mercantile Exchange), other index funds and over-the-counter derivatives (mostly offshore). Moreover, while the Sensex, due to its market making scheme, has gained volumes, the open interest (gauge of outstanding positions) is only 10 per cent of the Nifty.

“So, what is the guarantee that the BSE 100 share index can do what the Sensex has not been able to yet?” asked a trader, who handles index funds for an institution in this city. The market making scheme for the BSE Sensex index will end on July 31. Another analyst noted a big difference in the return that both indices have given in recent years and those of the Nifty being higher than the BSE 100. Also, volatility and frequent inclusion and exclusion of stocks in the indices are other factors that are key for portfolio managers. “To move away from Nifty, fund managers will have to re-balance their portfolios, as the sector weight of both indices will be a lot different,” said the analyst.

BSE’s F&O volumes jump

Derivative trading in the BSE Sensex surpassed that of NSE’s Nifty index for the first time. Sensex futures and options (F&O) worth Rs 98,011 crore were traded against Rs 95,415 crore worth of Nifty. Share of Sensex options stood at Rs 97,254 crore against Nifty options worth Rs 87,274 crore. Nifty futures worth Rs 8,141 crore were traded against Sensex futures worth Rs 757 crore. Overall, equity derivative turnover on NSE stood at Rs 1,51,384 crore against Rs 98,276 crore on BSE. The open interest on NSE stood at Rs 1,56,627 crore against BSE’s Rs 4,982 crore.

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