Rise in options turnover fails to enthuse brokers

Trading in options in the equity market has gained steady ground in recent months, with total turnover in the segment now much more than in the futures segment.

But, this has not resulted in a significant rise in business income of stock brokers. For, broking firms operate on wafer-thin margins in the options segment, with many charging a flat fee on a per-lot basis.

“In options, brokerage is a very significant portion and clients are very sensitive about it. With more and more investors looking at options, the margins have become quite competitive,” said Nandip Vaidya, president (retail broking), India Infoline. Many market intermediaries were ready to negotiate the brokerage on options from large clients, he added.

Options have attracted investor attention since the market entered into a volatile phase. In an options contract, a buyer has to only pay a premium at the time of entering into the contract. If at the time of maturity, the buyer decides against exercising the option, all he loses is the premium. So, the downside is limited to the premium amount. According to the latest monthly report of the National Stock Exchange (NSE), the volume in the index options segment has jumped nearly 40 per cent in the past six months.

“In terms of brokerage, the yield on options is not that significant. Due to the growing competition, many brokerages charge 0.5-1 per cent on the premium amount,” says Vinay Agrawal, executive director (equities broking), Angel Broking.

Interestingly, while options are becoming more and more popular by virtue of its design, brokers are not witnessing a corresponding rise in income from the segment. “According to exchange rules, one can charge brokerage only on the premium amount, that, at times, can be very low,” said Girish Dev, CEO, Networth Stock Broking. “So, most brokers have moved to a flat fee structure, charging between Rs 15 and Rs 75 per lot,” said Dev. The brokerage in options is capped at 2.5 per cent of the premium amount.

Retail investors have been steadily increasing their share in the derivatives arena. According to the NSE monthly report, their share in the total derivatives turnover was 57 per cent in February. In September 2009, this share was pegged at 54.7 per cent. This has made the market more competitive, as small investors are believed to be more sensitive to transaction costs.

The low initial cost has made options attractive. According to BS Research Bureau, the quantum of options trading has surpassed that of the futures segment in every month since November. In the current month (till 23rd), the total options turnover is pegged at Rs 683,679.2 crore, higher than that of futures (Rs 505,620.4 crore).