Price war beckons as F&O volumes spurt on BSE

Low transaction cost, incentives & change in expiry cycle add to record rise

The Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) may witness another round of price war, as derivative volumes are picking up on the former's platform.

The BSE has witnessed high trading interest in the options contract of the Sensex, its benchmark index, pitched against NSE’s popular Nifty index. This is due to a 99 per cent lower transaction cost in BSE’s options segment, coupled with incentives and a change in the derivative expiry cycle from the current month.

The share of the Sensex options was 92 per cent or Rs 16,255 crore in the overall derivative turnover of Rs 17,616 crore on BSE on Thursday. The jump is significant, as BSE saw a turnover of only around Rs 3,000 crore till last month. Comparatively, options contracts worth Rs 68,000 crore of the Nifty were traded on Thursday. Overall, the average daily derivatives turnover on NSE is well over Rs 1,00,000 crore. BSE is way behind.
 

OPTIONS GALORE
	Options	Futures
Sensex* (Rs cr)	16,255.11	1,325.76
Nifty* (Rs cr)	68,510.54	8,702.38
Turnover#  (%)	23.73%	15.23%
*Future Contracts - current month;  #Sensex % of Nifty turnover

While the NSE charges Rs 5,000 for every Rs 1 crore of options turnover, BSE takes a measly Rs 50 for the same. The NSE had lowered the trading cost in the futures & options (F&O) and the cash segments by 10 per cent in September 2009. This had resulted in a major spurt in options trading volumes, from around 10 per cent of all derivative trades to 45 per cent on NSE. In response, BSE had lowered the membership fees on its platform by 90 per cent to Rs 10 lakh in 2010 and also changed its derivative expiry cycle to mid-month from the last Thursday of every month.

“The pick-up in options trading on BSE is positive. NSE may have to bring down charges if Sensex options trading rises above Rs 25,000 crore by month-end,” said the MD of a Mumbai-based brokerage.

“While lower charges are a key catalyst, the change in derivative expiry cycle brought in interest even from foreign institutional investors this month,” said a BSE official.

The exchange launched a market-making scheme, known as Liquidity Enhancement Incentive Programmes last year. Under the scheme, BSE decided to spend Rs 107 crore for revival of its derivative segment in six months. Currently, BSE was paying for Rs 1,200 crore worth of volumes, while the rest were without incentives, the BSE official said.

The majority of this money is distributed among 100 brokers, which means each takes home at least Rs 1.5 lakh. Monthly, the exchange pays out Rs 10-12 crore against the Rs 17 crore it had planned. Therefore, it is believed that outgo of incentive money could be higher in February and March, the last two months of the scheme. Market players said the real test would be if it is able to sustain these volumes after the incentive scheme.