There are other factors which militate against premature and hasty introduction of futures and options trading. It is not realised that none of the malpractices like insider-trading, manipulation, front-running, price-rigging and circular trading prevailing in the cash markets are going to disappear. The Gupta committee itself admitted in the draft report that unless the weaknesses of the cash markets are removed, they may get compounded as a result of futures trading. The markets are also not going to be less volatile. Liquidity in the markets is also not likely to improve, as the causes of illiquidity in our markets are such that they cannot be removed even by futures and optionstrading. Moreover, such trading is not likely to trigger any sustained buoyancy in the markets. It is also not going to revive the confidence of the small investor and bring him back to the markets.

Availability of technical infrastructure in the stock exchanges may be a necessary, yet not sufficient, condition for the successful launch of derivatives trading.

Technological preparations in the stock exchanges without institutional preparedness and intensive investor education would be like putting the cart before the horse. Moreover, the biggest problem is not technology, but human nature. Hence, unless proper education is imparted in the type of trading to all the market participants, the futures and options markets may be as much bedevilled by imperfections and infirmities as are the present cash markets. It is, therefore, not surprising that even the Securities and Exchange Commission has said in a report that the real issue of the year 2000 is the regulation of derivatives and growth of proprietarytrading.

Even the iron-clad regulatory framework, by itself, will not guarantee the success of such trading, as mere thickness of the rule book will not ensure market discipline, as is proved time and again in the absence of strict monitoring, surveillance, vigilance and enforcement.

Gupta, the Ahmedabad IIM professor has warned the authorities repeatedly about the pitfalls of derivative trading of whatever nature in the equity market. In an article he says that when SEBI is finding it hard to manage risks in the carryforward market, which is akin to a weekly forward market, how is it going to effectively oversee the futures market where transactions remain outstanding for more than three months.

Another expert has also stated that we are far away from options and futures. When we have such difficulty in getting cash markets to work effectively, we will only increase the risk of major debacle by getting into complicated options and futures. Reservations about the advisability and necessity for theintroduction of futures and options trading at present are also expressed by Barua of IIM Ahmedabad.

SEBI has recently announced that FIIs would be permitted to operate in this market, and they can do so without giving or taking delivery of shares. It has to be borne in mind that FIIs have thorough knowledge and grasp of this subject and possess years of experience.

Domestic participants will not have a chance to succeed in this market unless

(i) They have adequate number of trained staff and are fully prepared to operate in this market
(ii) They have complete understanding and grasp of the complex nature and intricacies of risks involved
(iii) They are able to measure, evaluate and manage the said risks through the use of sophisticated mathematical models
(iv) They develop the necessary derivatives culture
(v) They understand the functioning and behaviour of the markets and develop the uncanny ability to forecast the trends in the markets, taking into account ever changing political andeconomic scenario and dynamics of the market place.

If we ignore such aspects and rush headlong into this uncharted area, SEBI will be instrumental in doing the irreparable harm to our own institutions.

The time is not opportune for the introduction of futures and options in our stock markets, particularly when we are also witnessing highly volatile and unsettled conditions in the markets.

Such trading is introduced in any country only when a stable environment prevails not only in the stock exchanges, but also in the political and economic spheres.

It should be realised that what is good for the Wall Street and London Stock Exchange or FIIs may not be good for our inefficient and under-developed markets and for our much sought-after retail investors. We may try to learn something from them but should not imitate them blindly to call ourselves modern.