Futures make market tense

CHOPPY MARKETS PART-II

Excessively leveraged positions in the futures market for stocks are spilling over to the cash segment. In the futures market, investors have to pay a small margin for taking a big position on a scrip.

In effect, investors can take a position on a larger quantity of a the scrip for the same money they would have to put up in the cash market.

But leveraging is part of the game, and a section of the market says, leveraging in India is still low compared with mature international markets.

"Leveraging is the basic characteristic of derivatives markets," says Mukul Pal, a derivatives analyst at Edelweiss Capital.

He explains the outstanding positions on the National Stock Exchange's futures and options (F&O) segment are roughly two times the volume traded in the cash market.

On January 28, for instance, the total open positions amounted to Rs 7,800 crore when the turnover in the cash market was Rs 7,078.89 crore. In European markets, the leveraging is close to 30-40 times the cash volume.

Though the market is spooked by excessive leveraged positions "" which are often cited as reasons for volatility "" fund managers say a vibrant futures and options market creates liquidity in the cash market, especially in a bullish market. Greater liquidity should lead to lesser impact costs and finer spreads between buy and sell quotes.

"Volatility too is part of the game and there is nothing to be scared of as long as traders pay up margins," Pal adds.

But what is happening now is that traders are using the futures and options market as a roulette table: the sole purpose is speculation and arbitrage between the futures and options and cash markets.

Navneet Bansal, associate vice-president in charge of derivatives at Kotak Securities, says: "Most of the day traders (in the cash segment) have moved into the derivatives segment. Moreover, stock futures give investors the chance to short (sell) a stock, which is not available in the cash market."

Roopchand Betala, director, Strategic Capital Ventures, says: "I think traders have started abusing the derivatives market by quickly squaring off their positions and depressing the cash market, thus creating panic. Ultimately, the arbitrageur shortsells in the futures and options market, or at best, closes his buy position, which means there is no real price discovery and traders are just riding price changes which are formed elsewhere."

For an investor, the main costs involved in the derivatives segment are the margins, mainly the initial margins and the mark-to-market margins.

For most stocks, these currently vary between 40 per cent and 60 per cent. According to Edelwiss' Pal, the margins are dynamic depending on the portfolio involved and also on the open interest in the particular stock.

Individual stock futures are where the action is with a share of around 65-70 per cent of the trade volume in the derivatives segment. SSKI, Kotak Securities, Refco Securities and Daulat Capital are among the top institutional brokerages in this market.

Kotak's Bansal adds: "The total return on arbitrage is around 12 per cent. On most occasions, the return is higher in the beginning of the month but as the cost of carry (finance cost) declines towards the month-end, the returns too fall.

"The madness in the market is likely to continue till the cost of carry comes down to realistic levels. Also, this secular trend in the market will continue till people really start using derivatives for hedging their positions rather than just speculating on price movements. But day traders are unlikely to change their spots."