Derivatives: absurd market lots

SMARTSHARE

Beginning February 23, as the punters usher in the crucial March series of derivatives, they will need to go back to school to learn the new maths of market lots.

The NSE vide its circular dated February 6 changed the market lots for 64 of the 155 securities that are traded in the segment. This is the fourth time that the bourse has altered the market lot for selective stocks.

This is a routine exercise that the bourses do to keep the value of the contract at around Rs 2 lakh. If the stock appreciates in value, the market lot is reduced and when it loses value, the market lot is increased.

Things were perfectly right as long as lots were in multiples of 100. But later alterations have produced quite exotic numbers that would take a Shakuntala Devi to remember the frequently changing numbers. 
 

MARKET LOTS
	Underlying stock	Present  market lot	Revised  market lot
1	Grasim	175	88
2	Mahindra & Mahindra	625	312
3	Siemens	375	188
4	Sterlite	875	438
5	Titan	411	206

The table will illustrate how absurd some of the market lots have now become.

The stock exchanges are merely following SEBI circular number SEBI/ DNPD/CIR-20/2004/02/23 dated February 23, 2004, which states that market lots have to be such that the contract value would always be around Rs 2 lakh.

The genesis of this circular lies in the crash of the year 2000-01. The entire blame was put on the "Badla" system, which was scrapped altogether. Derivatives trading was to be introduced and the Parliament was in session. The then SEBI chief, the soft spoken D R Mehta, did not want to take any chances so the matter was referred to a parliamentary committee.

The committee in its wisdom decided to keep the proverbial "small investor" out of harm's way. So SEBI was allowed to introduce the derivatives trading in the bourses, with a rider. The condition was that the contract value would be around Rs 2 lakh, beyond the reach of the small investor.

This was divided by the price of the share and the outcome was the market lot, which was rounded off to the nearest 100.

The market lots, which were first introduced in July 2001, have been hammered out of proportion. It seems odd that every time there is change, the trader should have to cram the new lots.

Nowhere else in the world, where derivatives are in vogue, do you have these odd numbers as market lots. In Singapore, Hong Kong and Australia you have 1,000 shares as a lot. South Korea has only 10 shares and the US has 100 shares as the lot. Lots do not change if the value goes up or down.

The underlying argument here is simplicity and transparency. You don't have to remember what the market lot is. All stocks have the same lot. And it stays that way. It's simple and equitable.

I am sure that if you have a uniform 100 or even 10 shares as market lots, the liquidity will improve tremendously. In the present day, barring the Nifty and a couple of large caps which you can count on your finger tips, options are highly illiquid. Finding a liquid option is as difficult as getting a Delhi auto that will be willing to go where you want.

I am sure that one day the regulators will see reason and have a uniform lot in place. But till that time, you and me better learn that Siemens will have a market lot of 188 shares and Titan of 206 in the new dispensation.