In 2002, Warren Buffett, who is often considered as the most successful investor of the 20th century, expressed his concern with derivatives, referring to them as ?weapons of mass destruction?. But brokers in India seem to be betting big on derivatives at a time when the equity markets, especially the cash segment, is showing enough signs of fatigue.
According to the latest data by the Securities and Exchange Board of India (Sebi), an increasing number of brokers are getting registered in the equity derivatives along with currency derivatives segments. Interestingly, this comes at a time when the number of registered brokers in the cash segment is witnessing a steady decline.
In the last one year, the number of brokers in equity derivatives has gone up by more than 20% from 2,315 to 2,797. Similarly, the currency derivatives arena has seen the number of brokers going up from 2,148 to 2,287, a rise of nearly 7% (see table). Incidentally, the number of brokers and sub-brokers in the cash segment has gone down by 3% and 10%, respectively, in the last one year.
Experts attribute this trend to the fact that many investors are now looking at the derivatives segment to maximise their returns, which is corroborated by the fact that the futures & options (F&O) turnover is rising even as cash volumes are on the decline.
According to a recent report by Icra, the domestic equity brokerage turnover (BSE and NSE combined) registered an increase of 16% (annualised) in the first nine months of FY13. ?This strong increase continued to be fuelled mainly by equity derivative volumes with cash volumes declining 9% while equity derivative volumes grew 19% over the same period,? stated the report. Brokers also add that currency derivatives saw a lot of activity last year since the segment provided a good opportunity to hedge against a depreciating currency.
?There is interest to do currency derivatives in the broking industry. Last year, many institutions have seen their revenues double from currencies platform. They could see a similar kind of growth year too as the base is too low,? says Prakash Kacholia, managing director, Emkay Global Financial Services. ?Also, brokerage houses can execute trades without additional investment in infrastructure and manpower. So, that increases the yield on sitting cost,? he added.
As per Icra, estimates, currency broking yields have remained in the range of 0.5?0.6 bps in the first nine months of FY13. ?The steady increase in currency market volumes as well as currency brokerage yields has led to an expansion of the currency brokerage revenue pool to R4-5 billion, an increase of around 8-12% when compared to FY11-12,? it adds.