NSE's contract lot revision may create more illiquid counters

The National Stock Exchange (NSE) has revised the contract size of 245 underlying with an aim to keep the value of a derivative contract between Rs 2 lakh and Rs 4 lakh as per the Securities and Exchange Board of India (Sebi) directive.

The exchange has also increased the market lot size of 243 underlying, while the same of two underlying – Lupin and Sterling Biotech — has been decreased with effect from December 26, 2008. The date of implementation of the new lot size for the two underlying is December 26, while for the 243 others is from March 2009 expiry.
 

JUMPING NUMBERS
Underlying	Market Lot

Open Interest % of MWP PresentRevised Gujarat State Petronet3050122008265501.18 Ballarpur Industries7300146008176001.21 Prism Cement5550222003829501.68 Firstsource Solutions47501900011875001.89 Peninsula Land2750165005307502.05 UCO Bank50001000010350002.59 Noida Toll Bridge4100164008364003.14 S Kumars Nationwide1900114008930003.76 Ashok Leyland47751910053957504.23 Dena Bank26251050015146255.41

The revision was very much required following the unprecedented fall in stock prices and also to check speculation in the stock market. But the revised market lots are likely to dry up volumes in the already illiquid counters. The overall ratio in terms of market-wide open interest in stock futures to market-wide limit has come down from a little over 22 per cent at the market peak (January 8, 2008) to a little over 8 per cent as of December 2, 2008.

The derivative data indicate that the counters of the underlying, whose contract sizes have been revised to over 10,000 shares each, are to be the most illiquid. For example, even at the current lot size, the open interest in Prism Cement, Firstsource Solutions, Peninsula Land, Noida Toll, Ballarpur Industries and Gujarat State Petronet has been marginal at around 1 per cent of the market-wide limit of each underlying.

“The increase in lot sizes of stock futures will negate the benefits of Sebi’s decision to extend cross-margin facility to all investors,” says Siddarth Bhamre, fund manager, Angel Broking.

“Volumes could have improved because of the cross-margin facility. However, due to bad market conditions, the volumes are likely to either remain constant, or may decline,” he says.

When it comes to individual stocks — of the 212 stock futures traded in January 2008, 21 stocks traded with an open interest of over 75 per cent compared to their market-wide limit.

However, as of November 25, 2008, only two stocks are having an open interest of more than 50 per cent of their market-wide limit. These two are GTL (61.4 per cent) and Educomp Solutions (55.3 per cent).

Oswal Chemicals and Parsvnath Developers were having an open interest of over 100 per cent on January 8, 2008, when the market hit its all-time high. However, as of November 25, 2008, Oswal Chemicals’ open interest was around 19 per cent, while Parsvnath’s was around 23.4 per cent.

In fact, more than 100 stocks are having an open interest of less than 5 per cent compared to their market-wide limit. Out of these 100 stocks, 40 are having and open interest of less than 1 per cent. However, when the market was at its peak, only 24 stocks were having an open interest of less than 5 per cent and none below 1 per cent.