India booms as record volumes lure high-speed traders

Pankaj Arora's Indian stock holdings have barely broken even during the past four years. However, options bets in March returned 250 per cent in eight days.

"I made a windfall," said Arora, a 30-year-old who works in the budgeting and accounting department of a private finance company in Mumbai. His Rs 12,800 ($236) purchase of put contracts on the nation's CNX Nifty Index paid off as volatility increased to an five-month high.

While stocks in the Nifty gauge are still about five per cent below their 2008 peak and equity trading has dwindled to a four-month low amid the weakest economic growth in a decade, India's options market is booming as the country's 21 million investors seek bigger returns. The eight-fold surge in options turnover since 2008 is now luring computer-driven traders as transaction costs fall, said Tushar Mahajan, the head of futures and options at Nomura Financial Advisory & Securities (India) Pvt.

"The global automated trading firms are coming to India," Mahajan said in an April 29 interview in Mumbai. "More and more such firms will keep coming as long as there are opportunities in the options market and they can capture the mispricing." The Indian unit of Getco LLC, a Chicago-based high- frequency trading firm, registered with the Securities and Exchange Board of India in February to trade local options, according to National Stock Exchange of India Ltd.'s website.

Exploiting liquidity
The 30-day average notional value of equity and index options traded on the NSE reached Rs 1.44 lakh crore ($27 billion) on April 25, the highest level since Bloomberg began compiling the data in 2002. Trading has surged from about Rs 16,300 crore in 2008, when tax cuts on options sparked a surge in demand for the contracts.

Equity turnover on the NSE and BSE Ltd in Mumbai dropped about three per cent in the same period to a combined Rs 13,000 crore, the data show. "Options are easier and cheaper to trade than stocks," Samir Gilani, the head of derivatives at IDFC Securities Ltd in Mumbai, said in a phone interview on April 29. "High frequency trading firms are coming to exploit the liquid environment."

Getco India Pvt. registered on February 6, according to the NSE's website. Sophie Sohn, a spokeswoman for Getco LLC in Chicago, said in a May 2 email the firm has opened an office in India and has yet to start trading. The Nifty index's 30-day historical volatility has surged to about 15 yesterday from an 18-year low of eight on January 11, data compiled by Bloomberg show. Price swings picked up as two of the nation's biggest technology companies, Wipro and Infosys, plunged more than 20 per cent last month on weaker-than- estimated sales forecasts.

Unilever deal
Hindustan Unilever., India's largest home-goods maker, surged 25 per cent after Unilever said April 30 it will spend as much as $5.4 billion to lift its stake in the Mumbai-based unit. Daily trading volumes in all three Indian companies' options jumped to record highs last month, according to data compiled by Bloomberg.

The 50-stock Nifty has climbed 2.8 per cent this year to 6,069.3, compared with a 0.4 per cent gain for the MSCI Emerging Markets Index. The Indian gauge, which reached a record intraday level of 6,357.10 in January 2008, trades at 13.7 times projected 12-month profits, a 29 per cent premium over the emerging markets measure, data compiled by Bloomberg show.