NSE may up F&O contract size to check speculation

The National Stock Exchange may revise the lot size of future contracts as the market slump has pulled the value of the contract size below the prescribed level of Rs 2 lakh.

About 93 per cent of 265 contracts have slipped below the minimum contract value mandated by the Securities & Exchange Board of India. Only 19 stock futures are trading above Rs 2 lakh.

The increase in the contract size may be required to stop speculators from a possible shorting of the futures market at a lower cost.

For example, a trader can buy 850 (lot size) shares of Kingfisher Airlines, say, at Rs 25 per share from the cash market and sell it in the F&O market the same day. The trader will gain from any fall in the value of the underlying without losing his holding.

Derivatives players have, however, not yet taken any aggressive position in low-value stock futures as the current open interest (OI) in these stocks has been almost 60 per cent of the May 2008 levels when the Nifty was hovering around the 5,000 mark. The index has fallen to 2,654 since then.

Data shows that out of the 265 stock futures, the contract value of more than 163 is less than Rs 1 lakh. Forty-four of the 163 stock futures have a contract value of less than Rs 50,000 and four out of the 44 have a value of Rs 25,000.

Out of the 50 Nifty stocks, only 10 are having a contract value of more than Rs 2 lakh, while three stocks have a contract value of less than Rs 50,000. In index futures, the contract value of Nifty has declined to Rs 1.35 lakh from its peak of Rs 3.14 lakh, while the value of CNX IT futures has dropped to Rs 1.18 lakh from Rs 2.46 lakh.

The most expensive stocks in value terms are from the pharma industry — Sterling Biotech (contract value Rs 4.79 lakh), Lupin (Rs 3.83 lakh) and Glaxo (Rs 3.52 lakh). Of the remaining 16 stocks, two more are pharma firms. This means that pharma stocks have outperformed the market in the downturn.
 

FACT SHEET
Company	Market Lot

Market price in Rs

Value in Rs lakh

8-Jan-0825-Nov-088-Jan-0825-Nov-08 Puravankara500450.4036.542.250.18 Kingfisher Air850284.5024.752.420.21 Brigade Ent550369.2542.002.030.23 Parsvnath Dev700550.2033.543.850.23 Unitech900525.0428.554.720.26 Nucleus Soft550360.0048.051.980.26 Amtek Auto600420.2544.152.520.26 DCB1400149.5019.102.090.27 IVR Prime Urban800407.0034.453.250.28 Century Textile2121202.75133.302.550.28 Patel Engg250967.30117.702.410.29

NSE has been revising the contract size every year. In December 2007, it lowered the contract size for as many as 105 stock futures after the key index almost doubled. The Nifty climbed to 6,138 on December 31, 2007 from 3,966 a year earlier.

NSE also reduced the contract sizes of 15 futures to one fourth, 74 futures to half and doubled the sizes for 14 futures.

The reduction in contract sizes was expected to help small investors to buy blue chip futures with a 3-month horizon, by paying 25 per cent margins (and mark-to-market in case of a price reduction), rather than taking delivery and paying the entire amount.