With no directional trend emerging, long-term investors are staying away from the equity market. Instead, prop desks of domestic brokers trading in index options as well as intra-day traders have become active and are contributing the most to volumes on the exchanges, say market observers.
?Of late, investors are focusing only on the short term. Only 1% of the investor population is willing to bet for the long term,? said DD Sharma, senior VP ? research, Anand Rathi. Added Jagannathan Thunuguntla, equity head at SMC Capital, ?It?s mostly the trading money that is being circulated. The real or long-term money betting on India?s sustainable growth theme is missing.? According to a research analyst with a leading brokerage firm, many day traders and arbitrageurs have been taking advantage of the rangebound market by writing options.
Prop desk of domestic brokers have also increased their exposure to index options as the risk is limited to the premiums paid. ?Both retail and institutional participation has remained muted for the last six months. So, it?s but natural that prop desks are running the show,? said Thunuguntla.
The share in options turnover as a percentage of the total F&O turnover has steadily increased in FY11 to 64% in the quarter ending March 2011 from 50% in the first quarter.
That Indian equities face an uncertain future can be gauged by the mixed signals given by foreign brokerage houses. While BNP Paribas, in a recent research report, said Indian shares are expected to under-perform in the coming months on concerns of policy tightening crimping demand, Citi analysts said India had the potential for strong returns in the second half of the year. Nomura, on the other hand, has said that a correction in the market should be used as a buying opportunity.
The BSE Sensex is down 10.2% in the year to date with foreign institutional investors offloading shares worth about $0.30 billion. Indian equities face several headwinds such as high inflation and interest rates, which could hit Corporate India?s expansion plans. And with the escalation of the debt crisis in Greece, the global economy also looks wobbly.
Intra-day trading is popular as it is much cheaper than taking delivery and offers the option of leverage. Some of the major prop traders include Adroit, SMC Global Securities, BLB, Dolat Capital and Edelweiss.