Cash volatility resounds in futures mart

June-July 3-month series starts off on record low volumes, short-term contracts unaffected.

The ongoing volatility and nervousness in the stock markets seems to have impacted the long term outlook of the market.

While the number of outstanding near term (1-month) and next term (2-month) contracts on the Nifty's future at the NSE remained more or less same on the first day of the new cycle begun June end, the first day saw just 3 contracts entered into for the 3-month Nifty futures.

The number represents 88 per cent drop on the previous month and 99.6 per cent drop from the peak of 743 contracts created in January end this year.

Compared with this, the number of short-term, one-month contracts open on the first day of the June-July cycle are up by about 1 per cent compared with the first day of the last cycle.

"Right now, the market is just too volatile to take a three-month view on," says Siddarth Bhamre, derivatives analyst at Angel Broking, "most people are sticking to the single-month or two-month contracts."

In fact, the disappearance of long-term contracts started during last month's cycle, when the average number of open three-month contracts dropped by a drastic 76 per cent over the preceeding April-May cycle.

Against an average 2,000 contracts a day that remained open in the three-month Nifty futures during the April-May cycle, the figure dropped to just 464 during the May-June period. However, during the two cycles, the levels of open interest in single-month and double-month contracts remained practically unchanged.

"Till now, it was easier to bet on the direction of the market even for three months, as the overall trend was bullish. However, with the current low levels of liquidity in the longer term contracts, it is virtually impossible to get out in case a sharp down-turn. As a result, local traders, who had taken a fancy to futures over the last few months owing to the low levels of margin they needed to furnish, have cut their exposure by 70 to 80 per cent. Instead of going for low-volume futures, they seem to be shifting back to the cash segment where fluctuations are comparatively lower," Bhamre points out.

Alex Mathews, head of derivatives research at Geojit Financial Services, looks at the reluctance of Indian investors to enter long-term futures market as a sign of lack of depth and maturity.

"The general perception among the investing public is that futures market is extremely speculative, which is accentuated by the fact that deliveries are not enforced upon the expiry of contracts," he points out

"In the US, there are five-year contracts on the general market which are subscribed to by ordinary investors. Here, however, most of the trading is done by traders, who have recently switched from cash market to futures."