Brokers Begin Informal Futures Trade
A small group of 25 brokers has begun informal futures trading by punting on the BSE sensex.
As per the rules they follow, the brokers will buy or sell sensex lots, based on their perception of the market. The minimum lot has been fixed at 10. All the outstanding positions will be squared off every Friday at the close level of the sensex. On the first day, trading volumes touched Rs 50 crore. "This is better than taking a position on individual stocks as it turns out to be more risky," said a broker who actively traded on behalf on his clients. "As the comfort level grows, more and more clients will trade on the sensex," he said.
The modus operandi is simple. If a market player is bullish on the sensex he can approach one of the 25 brokers and buy any number of lots on the index. Similarly, if a market player is bearish on the market then he can sell the index through the same set of brokers.
These brokers will, in turn, place the buy and sell quotes to others who have a contrarian view on the market. The broker will keep a record of the transaction . The transaction will be closed based on the closing index level on Friday. For example, if a broker goes long on the sensex at 3,100 and buys a lot of 100 on Monday_ and if the sensex closes at 3,150 _ on Friday, then the broker makes Rs 5,000 in the deal. This is the difference between the buy and sell position of the sensex, multiplied by the number of the lot purchased. There is no margin that is collected nor any deposit and the game is enitrely based on mutual trust. This informal market has no clearing entity and is also prone to counter party risk.
The brokers will offer a two-way quote and the maximum spread permitted is that of three points. To start with, the trading will be limited only among brokers. Once the concept catches on, some clients too will be allowed to take part in the trading. This entire operation is a prelude to the launch of derivatives trading in India which clearly indicates that the Indian markets have matured and that it is ready to accept new trading products such as index-based futures. It may be recalled that traditionally the stock brokers have taken a view on individual stocks and punted on them. However, this time around the market players have decided to punt on the sensex which according to them eliminates large portion the risk. Unlike the formal futures market, this market will remain open all 24 hours and anybody wanted to take a position can call up the brokers and buy sensex.