F&O selection raises a stink

The selection of stocks for futures and options (F&O) trading by the National Stock Exchange is inviting criticism from market players.

The NSE is adding 14 securities to the F&O menu from September 6, taking the total number of stocks in the derivatives category to 207.

Analysts said the exchange has ignored stocks that have more liquidity, while stocks with lower trading volumes get into the elite F&O list.

In the latest list, one inclusion that surprised many analysts is Lakshmi Machine Works. The average daily volume on the counter has been hardly 3,000 shares. Another perplexing inclusion is CMC, where the average daily turnover was a mere 5,000 shares on BSE.

"We don't know on what basis the stocks are being selected. May be, the exchange is seeing something which we are yet to spot," said a derivative analyst with a local brokerage, who wanted to remain anonymous for obvious reasons.

On the other hand, stocks with higher trading volumes such as Apollo Tyres (average daily turnover of nearly 30 million shares on BSE alone) and Apollo Hospitals (more than 50,000 shares traded on BSE), are yet to be included in the F&O segment.

When contacted, an NSE official said, "This (criticism) happens every time we announce a new list for F&O segment. We have just followed the rules, as laid out by the the Securities and Exchange Board of India (Sebi)."

The NSE submits a list of stocks which qualify for F&O trading to the Sebi and new inclusions are announced only after receiving the clearance from the market regulator.

The new entrants slated to join the F&O segment from Thursday are 3i Infotech, Aptech, Bhushan Steel & Strips, Biocon, Havell India, NIIT Technologies, Sasken Communication Technologies, Tech Mahindra, Tulip IT Services, Welspun Gujarat and YES Bank.

A stock can be selected for inclusion in the F&O category from among the top 500 stocks based on the average market capitalisation and average daily traded value in the previous six months on a rolling basis.

Further, the market wide position limit in the stock should not be less than Rs 50 crore. Since the market wide position limit for a stock is computed at the end of each month, the exchange should ensure that stocks comply with this criterion before the introduction of new contracts.

In May last, when NSE introduced 31 stocks in the derivatives list, there was criticism from market analysts who felt that some eligible stocks were conspicuous by their absence.

PERPLEXING CHOICE

14 stocks get into F&O list from Thursday

Lack of liquidity in new entrants LMW & CMC

At present, 193 stocks are in F&O list

Highly liquid Apollo Hospitals and Apollo Tyres are yet to get into F&O