'Volfefe' index effect: Global derivative volumes hit a record in 2019

The combined futures and options (F&O) volume on all global exchanges hit a record high in 2019, a year punctuated by US President Donald Trump’s Twitter tantrums. According to industry body Futures Industry Association (FIA), the global exchange-traded derivatives markets rose 13.7 per cent to an all-time high of 34.5 billion contracts last year. 

The NSE was the top destination globally in terms of the number of derivatives contracts traded. It piped US-based CME Group, despite the latter operating several exchange subsidiaries, such as the Chicago Mercantile Exchange and the New York Mercantile Exchange. 

India’s largest bourse conducted trades of nearly 6 billion F&O contracts, 57 per cent more than the previous year, shows the data. Total contracts traded on CME stood at 4.8 billion. In addition, total global open interest (number of outstanding contracts) at the end of 2019 stood at 900 million, up 9 per cent from the previous year-end. Trading activity in India was also underpinned by a spike in volatility because of a host of global and domestic factors. The Nifty swung 17 per cent during the year. 

Trading volumes are highly correlated with volatility — a consistent source for which were Trump’s tweet, especially against China, which often rocked the financial markets. 

The deceleration in economic and earnings growth, coupled with the NBFC crisis, kept investors on the tenterhooks last year. However, the markets managed to overcome most of the headwinds thanks to easy global liquidity. The corporation tax cut in September was a booster shot for the equities market.

Globally, the blow-hot, blow-cold comments by Trump on the trade war with China infused volatility. He rarely shied away from tweeting on sensitive topics, such as stock market levels, monetary policy, and trade deals. Analysts at JPMorgan even developed a “Volfefe” index (coined on “covfefe”, a mysterious word in a Trump tweet in 2017). 

Deven Choksey, managing director of KR Choksey Investment Managers, said while there were many reasons for the volatility, the uptick in volumes could be because of the increased use of algorithm- and machine-based trading. 

Yogesh Radke, head of quantitative research at Edelweiss, said the launch of weekly options has resulted in the spurt in derivative volumes.

In a statement, the NSE attributed the jump in volumes to “deepening of the equity markets”.“The NSE witnessed more than 12 million new registrations in the cash equities segment in the last five years, of which 8.7 million were in the last three years. It is also observed that a third of the new investors have come from tier-3 and tier-4 towns. Another heartening feature is the adoption of digital tools, with about 26 per cent of total trading activity in the cash equities segment coming through mobile and internet trading,” said Vikram Limaye, MD and CEO, NSE.

According to the FIA data, the BSE (including its GIFT City-arm India International Exchange) ranked 13th in terms of derivative volumes, while the Multi Commodity Exchange of India (MCX) ranked 18th. FIA analysed volumes and open interest from 80 exchanges operated in 34 countries.

Besides the NSE, Brazil’s B3 and China’s Shanghai Futures Exchange saw a sharp increase in derivatives contracts traded. Exchanges in the emerging markets recorded a sharper increase in volumes as compared to the developed markets.