Measures announced by the market regulator Securities and Exchange Board of India (Sebi) on Friday to curb volatility will impact volumes in the cash and the derivatives (futures & options) segments, say analysts. The measures, they estimate, will impact around 10-12 per cent of the stocks in the F&O segment. For most other counters, even if Market Wide Position Limit (MWPL) is restricted, they believe the open interest is far lower to have any meaningful impact.
MWPL is the maximum position that can be taken in both futures and options contracts. At present, MWPL is the lower of: 1) 30 times the average number of shares traded daily in the cash market during the previous month, or 2) 20 per cent of the free float market capitalisation.
“The immediate impact of these measures will be reduction in volumes in the cash and F&O markets. The volatility in individual stocks could also reduce, although delivery sales and buys could still result in higher volatility resulting in traders in such stocks getting impacted. Liquidity in individual stocks may get impacted to some extent,” explains Deepak Jasani, head of retail research at HDFC Securities.
“We have witnessed wild price movements in some stocks like IndusInd Bank, RBL Bank, Indiabulls Housing Finance and PVR over the last few weeks. The reduction in the MWPL limit can help these stocks gain stability,” says Vinay Khattar, head of research at Edelweiss Securities.
Sebi has also introduced limits on open positions for going short or long in index derivatives. This, Jasani feels, may be difficult to implement/track at the broker/exchange level on an online basis. As a result, brokers may play safe and restrict large fresh positions by big institutional and non-institutional players.
According to the new rules, in case the open interest (OI) exceeds 95 per cent of its position limit, the derivative contract enters a ban period in which investors can only reduce their positions. So, a lower position limit would automatically push scrips with high OI into the banned zone.
The fact that existing positions may not be impacted is welcome. However, traders will want to lock in their profits or cut losses on existing positions in case the index moves in a particular direction in a big way, analysts say.
“This could result in heightened moves for the first two-three days, post which, we could see sharp reduction in volumes and intra-day volatility. This may be one of the key objective of Sebi's move. Limit on creating long positions in index derivative segment means that the upmove later may also be slow/laboured,” Jasani adds.
India VIX, a measure of volatility and investors’ perception about the risk of sharp swings based on options prices, rose to its highest level since the 2008 global financial crisis recently, as fear gripped markets worldwide after the World Health Organisation (WHO) declared coronavirus (COVID-19) a ‘pandemic’. VIX had touched its historical peak of 85.13 on November 17, 2008, in the aftermath of the collapse of Lehman Brothers. In the past five years, it has stayed below 30.
“Market-wise limits have been reduced, which means more stocks likely to go into F&O trading ban period. Also, there is a practical short-selling cap at Rs 500 crore. If someone wants to speculate beyond this, twice the margin needs to be put up, which will be blocked for three months. This practically is like Additional Surveillance Measure (ASM) measure taken for stocks a couple of years ago,” says Jimeet Modi, founder & chief executive officer at Samco Securities.
NCC Limited, Indiabulls Housing Finance, Jindal Steel & Power Ltd, Just Dial, Adani Enterprises, Canara Bank, Steel Authority of India, Punjab National Bank (PNB), YES Bank, PVR and Vodafone Idea are some of the stocks that would probably go into ban period, analysts say.
(See table: Stocks with highest OI as a percentage of revised MWPL. Table Source: Edelweiss Securities)