Small brokers make it big on BSE F&O segment as long-term players missing

Small- and mid-sized brokerages appear to be having a gala time with the Bombay Stock Exchange (BSE) doling out commissions for trading in its derivative (F&O) segment. According to market participants, the top volume generators in the BSE F&O segment are mostly the proprietary desks of small brokerages and there is negligible participation from serious long-term players.

This would mean a disappointment for Asia’s oldest stock exchange that has been spending a lot of money to revive its derivatives segment. In June last year, BSE had said that it planned to spend R108 crore on such liquidity enhancement schemes (LEIPS).

The BSE derivative segment has been in the limelight in the recent past due to the sudden rise in the turnover, which touched record levels last month. Since the beginning of 2012, the turnover has risen 35 times from about R3,100 crore to R1.09 lakh crore on July 25.

Interestingly, the market is abuzz with names of some regional brokerages that are believed to be clocking high turnover in the BSE F&O segment. Kolkata-based entities like Salasar Stock Broking, Sankalp Share Brokers, Kredent Brokerage and East India Securities, apart from Adroit Financial Services, Marwadi Shares & Finance and Orion Stocks, are said to be quite active on the BSE F&O segment.

?It appears that trading in BSE F&O segment is only on account of the market-making scheme and there is not much of genuine interest,? said a person tracking BSE’s derivative segment. ?There is also no participation from the foreign players or any other known entities, which proves there is negligible long-term interest in the segment,? he added, wishing not to be named.

The BSE, while not disclosing the names of the top members contributing on its F&O segment, refutes this allegation. ?Few foreign brokers have contributed to this volume,? it said in an email response. It also says that under LEIPS 3, nearly 90% of the turnover was based on non-incentivised volume. Under LEIPS 4, however, 100% of the turnover was accounted for by incentivised volumes, it added.

The dependance of the turnover on the market-making scheme is also corroborated by the fall in the volume of Sensex options in the last few days. Currently, the market-making scheme is only applicable on derivative contracts of BSE 100 index and, so, Sensex options, which, till recently, accounted for bulk of the volume, are down to a trickle.

BSE started its first liquidity scheme in September last year. Thereafter, different market-making schemes have been launched for promoting F&O contracts based on its benchmark Sensex, BSE 100 and select single stock futures.

Under 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.