Business News Desk – The country’s two largest stock exchanges NSE and BSE have started implementing the new restrictions imposed by market regulator SEBI to reduce the over-enthusiasm of retail investors in option trading. Both the exchanges have increased the lot sizes for index futures and options (F&O) contracts. The new contracts will come into effect from November 20. To prevent attempts to use the F&O segment as a betting platform, SEBI had asked to increase the lot size of index derivatives to a minimum of Rs 15 lakh. As a result, NSE has increased the lot size of Nifty from 25 to 75, while Bank Nifty has increased the lot size of Nifty from 15 to 30. BSE has increased the lot size of Sensex contracts from 10 to 20 and the lot size of Bankex contracts from 15 to 30. That means now their premium will also double.
According to the exchanges, these changes in lot size will be applicable to all types of contracts like weekly, monthly, quarterly and half yearly. The existing weekly and monthly expiry contracts will continue with the old lot sizes till their respective expiry. Existing quarterly and half-yearly contracts will convert to the new lot size on December 24 for Bank Nifty and December 26 for Nifty. Long-term contracts with expiry dates of March 2025 and beyond will retain their existing market lots till December 27, after which The lot size for all long term BSE Sensex contracts will change to new lots.
How will options trading change for retail traders?
An increase in the lot size means an increase in the notional value of the contract and consequently an increase in the premium. That means, the option lot which could earlier be bought for Rs 14-15 thousand, will now have to be paid for Rs 28 to 30 thousand. For example, earlier if someone wanted to buy a Nifty option with a premium of Rs 200, he had to pay Rs 200 x Rs 25 (premium x lot size). Now you have to pay Rs 200 x Rs 75 = Rs 15,000 per lot.
Premium turnover reflects the market value of an option, while notional turnover is the total value of that derivative contract. For example, at the close on Friday, October 31, the premium for an Rs 81,000 Sensex call option was Rs 104.50 per share (10 shares in one contract). In such a case, the call premium would be Rs 1,045 (104.50 x 10), while the notional price would be Rs 8,11,045 (81,000 + 104.50 x 10). Premium turnover is important for stock markets because in option trading the government allows security transactions only at the premium. Tax (0.1%) is imposed. Exchanges also charge transaction fees not on notional turnover, but on a premium. Transaction fees are the main source of income for any stock exchange.
How much impact will these changes have on the exchange?
71% of the option premium comes from weekly contracts, while 29% of the premium comes from monthly contracts. According to investment firm Jefferies, closure of three weekly contracts of NSE and one weekly contract of BSE will reduce the premium by 40%. However, the decline is expected to be between 25% to 30% as investors turn to weekly contracts.
Will BSE benefit more from this change?
Between 1st and 14th of this month, a huge jump of 40 percent was seen in BSE shares. The company’s shares rose from Rs 3580 on October 1 to Rs 4989 on October 14, which is its highest level till date. The reason for the surge in BSE was the expectation that SEBI’s move would cause less loss to BSE than NSE, because while NSE runs 4 weekly option contracts, BSE offers only two weekly option contracts. That is, due to SEBI’s order, NSE will have to close three weekly option contracts, while BSE will have to close only one weekly option contract.
However, it is not so easy to assess the impact of this derivatives ban. Analysts believe that the option premium turnover of BSE is lower than that of NSE and hence the restrictions will have a severe impact on it too. BSE’s transaction revenue may further reduce due to new restrictions. According to a recent research report by Jefferies, BSE’s stock has registered a rise of more than 100% after the release of SEBI’s new F&O framework. The reason for this increase is the expectation that after the new restrictions the trading in derivatives trading in NSE will reduce, its clients will come to BSE and this will increase the market share of BSE. But the reality is far from this.
The new F&O framework has no impact on monthly contracts and accounts for about 30% of the total options market. BSE’s market share in this segment is only 10%. At the same time, expecting BSE’s market share to increase to 40-50% in weekly contracts seems overly optimistic. Data shows that the notional-to-premium turnover ratio of BSE in index options so far in the current financial year is 1,442, which More than double NSE’s 605. This means that the premium turnover of BSE is still far behind that of NSE. Let us tell you, till October 15 in the current financial year, NSE’s market share in index options (premium turnover) was 88.5%. Analysts believe that the lower premium turnover of BSE compared to NSE is due to NSE taking an early lead in successfully launching and running the contracts.
Why is NSE ahead of BSE in derivatives market?
NSE has been running liquid and successful contracts on Nifty since February 2019, while BSE relaunched Sensex options in May 2023. Also, monthly Nifty options contracts are much more liquid than Sensex. Weekly Nifty options contracts are more mature than Sensex options, which were relaunched only last year with different expiry dates. To increase premium turnover, BSE monthly options will have to attract traders.
Top officials of several broking firms, speaking on condition of anonymity, said there are two reasons for NSE’s high premium turnover. Firstly, the liquidity of its monthly options is very high and secondly, the participation of institutional investors in its weekly contracts is high. At the same time, most of the premium turnover on BSE occurs near expiry, when premiums usually go down. Brokers say the market is viewing the regulatory measures as creating a level playing field for both the exchanges, but weekly options Limiting the contracts to one per exchange and increasing the lot value from the current Rs 5 to Rs 10 lakh to Rs 15 to Rs 20 lakh from November 20 will cause losses to both the exchanges. Let us tell you, NSE currently offers four weekly index option expiry contracts (Nifty Offers Midcap Select, Finifty, Bank Nifty and Nifty). At the same time, BSE offers two such contracts in the form of Sensex and Bankex. From November 20, NSE will run only Nifty weekly contracts and BSE will run only Sensex weekly contracts, this will also reduce the trading volume of both the exchanges.
