BSE devises plan to revive F&O trade

The exchange plans to offer investors rebate on big derivatives trades.

In another attempt to kick-start its derivatives segment, the Bombay Stock Exchange (BSE) has sought the Securities and Exchange Board of India’s (Sebi’s) permission to launch a liquidity provider scheme.

Sebi officials said they received a letter from BSE in early December. We would response soon, they said.

If allowed to launch the scheme, the exchange, which has 25-30 per cent market share in cash equities, will be able to attract trader attention in the futures and options (F&O) segment as well. At present, equity derivatives trades are concentrated on the National Stock Exchange (NSE), with an average daily volume of over Rs 1 lakh crore.

When contacted, BSE officials declined to comment.

Sebi sources said the scheme was similar to that run by top global exchanges like the Chicago Mercantile Exchange (for Nifty futures contract), the NYSE Euronext and the European derivatives giant Eurex.

BSE has devised an incentive package for players who provide liquidity to the F&O segment. The exchange will offer traders a rebate of Rs 2,000 on passive orders and Rs 1,000 on active orders for every Rs 1 crore order in the futures segment. In the options segment, the rebate will be to the tune of Rs 4,000 on passive orders and Rs 1,000 on active orders for every Rs 1 crore order. Market participants who want to act as liquidity providers will have to first register with the exchange.

In a passive order, a broker bids for a security at a price lower than its level, to be booked later when that happens. In active orders, one buys the security at the price it is available.

According to stock brokers, the move may go a long way in reviving F&O volumes on BSE. “If the exchange gives a rebate on F&O trades, large institutions may also look to generate volumes. It will at least help brokers cover the securities transaction tax (STT) that they pay,” said a Mumbai-based broker.

At present, BSE pays around Rs 125 crore STT every month on trades generated on its platform, while NSE pays around Rs 500 crore.

In an earlier attempt, between December 2006 and May 2008, BSE had launched a market making scheme for the derivatives segment under its previous management team headed by Rajnikant Patel. It roped in stock brokers Apollo Sindhoori Capital Investments and Sam Global Securities as market makers.

The scheme, however, was discontinued, as Sebi asked the exchange for a fresh proposal with a proper structure to gives incentives to all market participants providing liquidity to the exchange.

The exchange is also in the process of introducing physical settlement in derivatives, which will bring down volatility in the segment, mainly during the expiry of F&O contracts.