New derivatives cycle fails to click for BSE

The Bombay Stock Exchange’s (BSE’s) move to change its derivatives expiry cycle to mid-month to revive its dormant equity derivatives segment has not impressed the market. The daily derivatives volumes on BSE have been in the range of Rs 20-80 lakh over the past couple of weeks, down from Rs 20-25 crore in January.

Around two months ago, BSE changed its futures and options (F&O) expiry cycle from the last Thursday of every month to the 11th day of every month. Top BSE officials were quoted saying that the mid-month expiry would pick just before the Budget session.

BSE officials were of the view that investors had a better opportunity with their exchange to place directional bets based on Budget announcements as the cost of carry on BSE, during the end of the month, would be less than what it would be on rival National Stock Exchange (NSE). BSE was also hoping that a separate expiry cycle would create an alternative cheaper window for options traders.

The February contracts of NSE, which expired today, saw 59 per cent rollovers as against 60 per cent rollovers in the previous month’s expiry. The Nifty index saw 55 per cent rollover of positions into the next series, which is less than the average of 60 per cent. The derivatives volumes on NSE were in the range of Rs 70,000-1,00,00 crore.

A BSE official attributed the lacklustre response to its mid-month contracts to the fact that “traders take time to get used to any new product”.

“For many years, Indian investors have been trading in derivatives contracts that expire on the last Thursday of every month. So, getting them to trade on a mid-month cycle is difficult. Once the trading community realises its advantages, volumes will start picking up. These things take time,” said a BSE official who did not wish to be named.

According to market players, even though BSE’s mid-month expiry contract was theoretically sound for playing the Budget theme, the F&O volumes did not pick up as liquidity proved to be the biggest block.

BSE contracts have a bigger tick size and an active-passive pricing structure. BSE recently increased the ticket size for Sensex futures and options from Re 0.05 to Re 1.

Apart from changing the derivatives cycle, BSE has also announced a rebate for traders placing passive orders. It is also in the process of upgrading technology and trading systems and is setting up a data centre for providing co-location facility to its members.