The domestic stock exchanges have seldom had it so good. Over four years of a bull market, coupled with investors entering in droves — it’s a heady mixture for the bourses. Consequently, their coffers have been flowing over.
Sample this: India’s biggest stock exchange – the NSE – reported a 57% and 94% year-on-year growth in profit in the last two quarters of FY25, respectively. Its listed counterpart – the BSE – has doubled its profit (y-o-y) every quarter in the past two years except in the fourth quarter of FY24.
But as they say, all good things come to an end. While the sharp decline in the markets since September has reduced investor enthusiasm significantly, the Securities and Exchange Board of India’s (SEBI) strict guidelines on the futures and options (F&O) segment has taken its toll as well.
SEBI, prompted by the finance ministry and its internal research, moved to curb retail investors’ enthusiasm in F&O, and both brokerages and stock exchanges are now feeling the heat. The total F&O volumes in the current quarter stand have fallen to Rs 15,205 lakh crore, which is half of that in the second quarter of FY25, when it had hit Rs 32,734 lakh crore. The total F&O volumes were close to Rs 15,108 lakh crore in the first quarter of FY24.
With shrinking footfalls at the trading terminals, exchanges are back to slugging it out for fewer customers – much like the old times. An NSE spokesperson said: “The stock exchanges are frontline regulators of stock markets, the notion of competition is not important in such a role.” But market share does matter, as it impacts profitability as well as valuations.
The turnaround story of BSE: The fortunes of the BSE changed remarkably after Sundararaman Ramamurthy took over as its MD and CEO in April 2023. Elected with 71% votes, Ramamurthy, who had earlier spent over two decades at the NSE, made significant changes.
One of the key factors was its decision to change the expiry for the Sensex F&O contract from Thursdays to Fridays. Following Sensex’s success, the BSE moved the Bankex’s expiry to Mondays from Thursdays. This followed the introduction of single-stock derivatives by the exchange from July 1 and other unique products in the index derivatives.
Further, the norms announced by SEBI requiring exchanges to have only one index with weekly expiry contracts also aided its market share gain, as this led to the discontinuation Nifty Bank’s weekly contracts, which garnered the largest number of contracts. Since January, the monthly contracts of Sensex, Bankex, and Sensex 50 have been expiring on last Tuesday of each month and weekly contracts every Tuesday.
All these factors can be seen working for the BSE as its market share has risen from 4.2% in the second quarter last fiscal to 36.8% in the ongoing quarter in the F&O market. Investors also rewarded it, as its share price from last July to the end of this January jumped by 140%.
But then… Since February 20, however, its shares have fallen 30%. It all started when the markets regulator proposed the replacement of the current ‘notional terms approach’ for the calculation of open interest in equity derivatives to future-equivalent or delta-based approach. This led Goldman Sachs to cut its target price for the stock, noting that nearly 70% of the BSE’s average daily turnover is driven by proprietary traders, and their trading activity could be impacted by the regulator’s proposed adjustments.
According to Mehul Kothari, DVP of technical research at Anand Rathi Shares and Stock Brokers, the market corrections have cut F&O volumes with the NSE’s daily turnover dropping 38% and the BSE’s 19% in recent times.
Kothari added that SEBI’s rules—fewer weekly expiries, larger contract sizes—have reduced retail trading as well.
NSE’s reactive measure: With all of this coming into play along with the loss of market share, the NSE took a “reactive” measure, said Deepak Jasani, independent research analyst, referring to the change of its derivatives contract expiry to Monday from Thursday, effective April 1 – something that will bring it in direct clash with the BSE.
NSE MD & CEO Ashish Chauhan has defended the move by saying that SEBI’s perspective of reducing daily expiry won’t be met, if stock exchanges continue to have multiple expiries on different days. “So, for me, if you want to really remove that, you need to have one single day, whichever way,” he said at an event organised by Moneycontrol.
On the other hand, according to media reports, BSE’s Ramamurthy has been non-committal whether the exchange would also change the expiry day. “We are trying to comprehend what the market feedback is, and based on that, we will be able to take the call.
However, analysts are already predicting a hit on the BSE’s turnover. A note by Motilal Oswal had calculated a 10-15% hit on the BSE’s premium turnover. It also noted that since January after the shift of the BSE’s weekly and monthly contracts’ expiry to a Tuesday, the average market share for the BSE on Mondays have been 20-22%, and on Fridays, it has been 15-17%. “With the shift in expiry, these volumes could shift to the NSE,” it said.
Jasani is also of the view that a same-day expiry would create a monopolistic market for the NSE, given that it already enjoys a dominant market share. According to Jasani, the BSE will watch the volumes after Monday expiry gets implemented and change its expiry day again. “This will go on between the exchanges back and forth until the SEBI intervenes informally,” he said.
As they say, let the games begin.
