Future of futures, opting for options

Font Size

Print

Feedback

Email

Discuss

: Before derivatives trading began, NSE and BSE were all-electronic equity spot markets. By international standards, they were small markets. They had roughly equal market share.

Derivatives trading, which started in June 2000, was a turning point in many ways. The size of the spot and the derivatives business was qualitatively transformed as a consequence. NSE fared much better than BSE at derivatives trading. And after all these changes had fallen into place, NSE and BSE were both amongst the top 10 exchanges of the world, measured by the number of transactions.

In this article, we look more closely at the experience of NSE with derivatives trading, analysing the sub-components of turnover, measured in contracts per month. This is admittedly an imperfect measure, because all contracts are not identically sized. At the same time, this analysis does yield useful insights into the evolution of NSE.

Derivatives trading started at NSE in June 2000. At the outset, there was only one contract: Nifty futures. Stock futures, stock options and index options were all prohibited. In June 2001, index options trading commenced. Stock options trading started in July 2001 and stock futures trading started in November 2001. Thus, the full set of equity derivatives products were only available in November 2001.

The 9/11 attacks on the World Trade Centre in the US were the first important event surrounding which index derivatives trading came to be of interest. In July and August 2001, Nifty futures trading amounted to 0.06 million contracts per month. This jumped to 0.15 million contracts in September 2001.

Starting from November 2001, the growth in the number of contracts traded at NSE has been remarkable. Figure 1 shows this time-series, in log scale. The superposed time trend implies an average compounded growth of 5.1% per month. Few derivatives exchanges worldwide have obtained such a hectic pace of growth in the early years after launch.