Even as the street debates the usefulness of the liquidity enhancement scheme, introduced by BSE, to boost long-term investor participation on its derivatives platform, the scheme itself has weighed on the financial performance of the bourse.
While market activity has been muted since second half of 2011, the exchange has witnessed a sharp decline in its net profit since December 2011 quarter. That?s when it started accounting the costs related to its liquidity enhancement scheme called LEIPS ( Liquidity Enhancement Incentive Programme), according to financial data available on its website.
The operating profit before tax (PBT) has shown a sequential decline in the last three quarters, even as the operating income showed a positive growth for two of the three quarters. Even for the first quarter of 2012-13, BSE reported a more than two-thirds decline in net earnings (Profit after tax) to R15.4 crore, compared with R64.2 crore in the same quarter last year. The operating revenue on the other hand shrunk by about 10% to R125.4 crore y-o-y in the June quarter.
One can argue that the domestic exchanges have seen an impact of sluggish market and reduced investor participation in the equity markets in last one year reflected by the falling cash market volumes and declining open interest in some of the popular products like Index futures.
However, this argument fails to justify the eight-fold decline of net profit compared with that of operating income. Even the sequential performance has suffered due to LEIPS cost of R40 crore, which is identified as the exceptional item in the financial statements. While operating income has fallen 18% in the three-months to June compared with March 2012 quarter, PAT has declined 65% q-o-q basis.
LEIPS expenses have started to account for a higher portion of the operating revenues. While they made up about 14% of operating income in the quarter ending December 2011, in the consequent quarters the same has increased by 27% and 32%, respectively.
In June last year, BSE 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. 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 ? were recently 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.
Under LEIPS 6, market makers as well as general market participants are offered both volume and open interest based cash incentives while market makers are offered quote based incentives.