Cash segment volumes dip as retail investors stay away

Stock market indices are at new highs but trading volumes in the cash segment continue to remain depressed.

Data on the exchange websites suggest a steady decline in the cash segment trading volumes, which experts say is indicative of weakening retail participation.

The average value of daily trades in the cash segment is at a four-month low, according to exchange data. The figure for November is Rs 12,580 crore, compared to Rs 14,566 crore in August, a fall of 13.6 per cent. The volumes have fallen every month since August and market participants are not hopeful of a turnaround.

“This is a sign of the continuing lack of faith in equities among retail investors. There is no interest in participating in the market at these levels. Every new high is being seen as an opportunity to book profits and exit the market,” said Rahul Rege, business head (retail), Emkay Global Financial Services.

Analysts said volatility in stock prices generally leads to a spurt in volumes, as was seen in August. While the NSE Nifty declined about five per cent on rupee depreciation and concerns surrounding the tapering of the US Federal Reserve’s stimulus package, trading volumes during the month gained by 18 per cent.

“When there is large volatility, there is a lot of activity in the market and we see volumes going up. But the pick-up in volumes will only sustain if stock prices move up. Otherwise, such activity is short-lived,” said Vinay Agrawal, executive director (equity broking), Angel Broking.

However, this was not the case in September and October, when share prices moved up but volumes continued their downward slide, as the rally in the stocks was led by sustained buying by foreign institutional investors (FIIs) and was not broad-based.

“FIIs were selectively buying in the index, large-cap stocks. So, though the markets moved up, the retail segment did not make any money because there was hardly any pick-up in the mid-cap and small-cap stocks where they are heavily invested,” said Agrawal.

  Observers say the high volatility and lack of depth also caused the gap between ask and bid prices, a measure of market efficiency. At present, cash volumes account for a tenth of total trading volumes. In addition to institutions, smaller investors like high net worth Individuals are also increasingly moving to options trading, analysts said, due to low trading costs.

Participants say even the arbitrage business in the cash segment had taken a hit, on account of low volumes. “The capacity to absorb the cost in brokerages had gone down, due to low retail participation,” said Rajesh Baheti, managing director of Crossseas Capital.

“Besides, arbitrageurs in the retail side of the business are unable to keep up with the algo trades of the institutional side of the business. If the trade is on the wrong side, you end up losing more money,” added Rege.