The combined derivatives turnover on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) rose to R2.9 lakh crore on Wednesday, an increase of 16% over Tuesday. Driven by the liquidity enhancement scheme promoted by the BSE, volumes on India?s oldest exchange accounted for nearly 37% of the total volumes on Wednesday. Even a month back, they had contributed just 12% of the total volumes of R2 lakh crore. Volumes in the futures and options segments of stock exchanges have seen a spurt in the recent past. While there is usually a jump towards the time of the expiry of any F&O series, this time around, the jump has been the result of surging turnover on the BSE.
The sharp increase in volumes on the BSE has been attributed predominantly to the incentive scheme offered by the bourse that has encouraged greater participation by proprietary desks of small to medium size brokers. The NSE has dominated the F&O space ever since trading in derivatives was launched.
?There are still no institutional participants on the BSE derivatives segment as is evident from the low levels of open interest,? a dealer points out, adding that the jump in the volumes has not been matched by a similar jump in open interest. ?This indicates that there is an intraday participation but no positions that institutional desks generally have,? he added.
Since the beginning of the year, the derivatives turnover on the BSE has risen 35 times from about R3,100 crore to R1 lakh crore on Wednesday. The open interest on the other hand has jumped only four-fold to 1.77 lakh contracts in the period. Open interest generally denotes total number of derivatives contracts which are not squared off or closed on any day.
?For BSE to be called a competitor, volumes need to sustain. That looks difficult given that a substantial chunk of the increase is due to market making driven by the exchange?s liquidity enhancement scheme,? said an executive of a brokerage house. According to him, a couple of brokerage houses are using their proprietary books to take advantage of the BSE?s incentive plan called the liquidity enhancement incentive programmes (LEIPS). ? The scheme lowers the transaction cost of options,? he added.
Currently, the securities transaction tax (STT) is calculated on the premium of an option traded, which is a much smaller amount than the notional value. Consequently, the statutory cost of a transaction of an option instrument turns out to be ten times lesser than that of a future instrument.
Not surprisingly, nearly 99% of the BSE?s total derivatives turnover is accounted by index options. This is much higher than about 77% for the NSE.
In June last year, BSE had said that it plans to spend R108 crore on such liquidity enhancement schemes. It started its first liquidity scheme (LEIPS) in September last year and the beta testing went on for a month. Thereafter in October 2011, LEIPS 1 was launched for Sensex futures and Bankex, which continued for six months.
In February 2012, LEIPS 3 was launched to promote Sensex options and was followed by LEIPS 4 in May for Sensex futures. Two other market making schemes ? LEIPS 5 and LEIPS 6 ? are scheduled to be launched on August 1 for single stock futures and F&O on BSE 100, respectively.
Under the market making schemes, when an investor registers for trading in the BSE F&O segment for the first time, he is paid R100. Under LEIPS 4, market makers are given trading volume-based cash incentive of R1,800 per crore. These schemes also have a daily pool of cash incentives given once the volume crosses a pre-defined limit.