In what could spell more trouble for domestic brokerage houses, the NSE derivatives turnover in July has seen a drastic decline.
Experts attribute this to a slowdown in activity in index futures, fall in day trading activity and reduction in arbitrage play by foreign institutional investors (FIIs) and mutual funds (MFs).
Against the six-month daily average turnover of Rs 85,399 crore, average turnover values for July have plummeted to Rs 64,710 crore. This does not bode well for brokerages, since derivatives turnover forms about 80% of total market volumes. Brokerages typically charge Rs 1,000 for every 1 crore of turnover at the rate of 0.01%, implying a loss of Rs 10 lakh for every Rs 1,000 crore decline in turnover.
Declining turnovers are mainly due to shift in action from index futures to stock futures. ?The market is not going anywhere, so investors are opting for stock futures instead of index futures,? said Siddarth Bhamre, head ? derivatives, Angel Broking. ?Volumes on stock futures are much lower compared with index futures as investors are wary of taking high exposure in the former due to the high risk involved.?
Activity in stock futures itself has dipped because of lacklustre rollovers in June expiry. ?Many positions did not get rolled over in stock futures because of the change in lot size as a result of which there are not enough open positions to roll over this month,? said TS Harihar, co-head – institutional derivatives, ICICI Securities.
Sideways market movement is prompting day traders (especially proprietary traders), delta traders (proprietary traders and institutional investors) and option writers to stay away. While day traders play on intra-day volatility, option writers incur an obligation to sell the option in return for a premium, which typically rises with increasing volatility. Delta traders hedge their positions by dynamically adjusting their portfolio of calls, puts and futures and contribute significantly to market volumes. It is estimated that delta trading volumes have fallen 15-20% in the past week. Falling turnovers can also be attributed to muted arbitrage activity by FIIs and MFs. ?Several FIIs have reduced their arbitrage positions in search of better returns,? said a senior executive of a mutual fund. MFs are staying away as several arbitrage funds have got redemption calls in June, resulting in a depletion in their assets under management (AUM).