Lockdown, tightening of regulatory framework hurt market volumes

Recent Sebi move, drop in securities' prices contribute to the fall

Though the stock markets continued to function amid lockdowns in several cities before the start of a 21-day nationwide restriction on Wednesday, trading activities took a beating. The average daily trading turnover for the futures and options (F&O) segment for this week was 66 per cent lower than the yearly average.

Market players said lockdowns and recent tightening of the regulatory framework by the Securities and Exchange Board of India (Sebi) were to be blamed. Part of the reason for the drop in trading turnover was a sharp fall in the price of underlying securities. However, market players said even going by the number of contracts traded, volumes were 20 per cent lower than usual.

“The drop in volumes is on account of multiple factors,” said Chandan Taparia, head of derivatives and technical research at Motilal Oswal Financial Services. “The fall in the market has dampened investor sentiment which has impacted investor participation. Also, the lockdown has led to operational difficulties. Third, the tightening of the regulatory framework by Sebi has also played its part.”

The F&O turnover on Wednesday stood at Rs 6.8 trillion, which, experts said, was unusually low for a pre-expiry day. In January and February, trading volume a day ahead of the derivative expiry stood at Rs 17 trillion and Rs  19 trillion, respectively.

Market players said because of the lockdown most brokers are working from home and hence, are not able to operate at optimal levels. Also, brokers have stopped encouraging leveraged bets because of the spike in volatility, they said.

“Earlier, brokers used to allow their clients to operate on leverage. These days most brokers are wary of this because of the record high volatility,” said an industry player.

The India Vix index, a gauge for market volatility, on Tuesday closed at an all-time high of 86.6, higher than the levels seen during the 2008 financial crisis.

In a bid to bring down market volatility, Sebi on Friday had tightened the framework for derivatives trading. Among the changes announced by Sebi are a reduction in so-called market-wide position limit for highly volatile stocks, and an increase in margins and penalties. The changes came into effect from Monday. Another operational issue highlighted by industry players was the collection of payments. “A lot of traders still deal with cheques. Because of the lockdown, brokers are not able to collect and encash their cheques, which too, could be impacting volumes,” said the person quoted above.

While government authorities have exempted companies, part of the stock market ecosystem, from the lockdowns, several industry players have complained of difficulties getting to the office. On Tuesday, the central government announced a 21-day nationwide lockdown. However, the state government’s announced lockdown had come into effect in Mumbai, the biggest contributor to trading volumes, last week.

Yogesh Radke, head of alternative and quantitative research at Edelweiss Securities, said volumes could come off further because of the ongoing lockdown. Market players said the shallow F&O volumes isn’t healthy from the market point of view as it may hamper price discovery and lead to manipulation in some counters.