It seems the opportunity of tax arbitrage is driving investors away from the cash segment of the domestic equity bourses to its derivative segment. The cash market turnover on both the National Stock Exchange and the Bombay Stock Exchange (BSE) have dropped 14% and 20% respectively in 2010-11 according to the data available with the Securities and Exchange Board of India (Sebi). However during the same period the NSE derivative markets has seen a spurt in its volume by 65% primarily driven by its options segment.
Currently the Securities Transaction Tax (STT) is charged at a relatively lower rate on F&O trade at 0.017% while in the cash market, delivery-based trade carries an STT of 0.125% and intra-day trade have an STT of 0.025%.
According to market participants even in the derivative segment, increasing number of traders now prefer the options markets as STT and brokerages are charged on the premium paid by an investor for buying an options contract while the same is charged on the total notional value of the index and stock futures contract.
?The cost of transaction while taking position on the futures contracts (stock and index) are 6bps-7bps higher than the cost incurred in buying a call or a put option contract. This is the main reason why options contracts have gained momentum among investors and traders,? said T S Harihar, head of institutional derivatives at ICICI Securities.
The shift towards the options segment could also be gauged from the fact that the total turnover on the index and stock options contracts during 2010-11 have surged by 129% and 103% respectively compared to the volume growth of just 5.78% and 10.73% in stock futures and index futures.
However, the volume of stock options as a percentage of the total F&O contracts is just 3.5%, while index options accounts for 62% of the total trade.
According to Sayee Srinivasan head of product strategy and development at BSE, the stock options haven’t picked up significantly since the writer of the option has to take huge risks as the contracts are cash settled in India. ?Moving to delivery-based settlement reduces the risk for option writers. Even globally successful stock futures and options exchange have delivery based settlement,? he said. In an attempt to revive its derivative segment, BSE recently moved towards delivery based settlement for its stock futures and options contracts.
Experts also cite the sluggish equity markets during the last financial year for the increased trading on the F&O segment. Rajesh Chakrabarty, assistant professor, Finance, Indian School of Business, says, ?usually short-term betting activity on the futures and options segment picks up significantly when there are no clear directional movement on the cash market.?
In-fact during the last financial year BSE Sensex had gained just 11% and NSE Nifty 11.14%. This is when compared to gain of 80.54% and 73.76% respectively seen during 2009-10.