Options trading gathers steam in Q2; share of cash in average volumes falls

Share of cash in falls from 2.9% to 2.5% in September quarter

The share of cash volumes in the overall trading mix has taken a knock in the first two quarters of the current financial year, squeezing margins of retail brokers.

The share of cash in average daily trading volumes has declined to 2.5 per cent in the second quarter of FY20. 

This number was 2.9 per cent for Q1Y20. The full-year figures also indicate a sharp fall. With the exception of FY16, the share of cash volumes has declined consistently from 7.7 per cent for FY13 to 4.1 per cent for FY19.

Conversely, the share of futures and options (F&O) has risen, with the options segment cornering more than 90 per cent share in the first two quarters. For FY19, the share of options stood at 86.1 per cent, up from 76 per cent for FY13.

“The market volatility is prompting more traders to use the options route,” said Deven Choksey, managing director, KR Choksey Investment Managers. 

Chandan Taparia, head – technical & derivatives – Motilal Oswal Financial Services, said: “Individual stocks have seen sharp moves of 5-8 per cent in the past few months. This has created fear among traders and led them to shift to options, particularly index options, to hedge their bets.”

Options contracts offer the buyer the right but not the obligation to buy at the specified price or date. Cost is low and one can alter strategies to suit market conditions. For options buyers, the risk is limited to the investment made. The dip in delivery trades and the rise of discount brokers have squeezed margins further. 

Most discount brokers charge a flat fee of Rs 20 per trade compared with 10-30 paisa charged by full-service brokers for delivery trades, 2-4 paise for intra-day trades and Rs 20-50 per lot for options trading.

“The rising share of F&O in the mix and fall in share of delivery-based volumes have contributed to the fall in blended yields for most brokerages,” observed a note by HDFC Securities.

Several listed brokers have long diversified into lending, private wealth management, asset management and even insurance. Shares of these firms had done well owing to the rally in stocks of non-banking financial companies (NBFCs) in 2016 and 2017. The IL&FS crisis and the fall in mid-and small-cap stocks last year turned the tide as share prices of most listed brokerages have fallen in the past year. Except for ICICI Securities, share prices of these brokers are down 7.5-58 per cent in the year to date.

Large domestic brokers are now focusing on the online space, with emphasis on automation. The share of internet and mobile trading continues to see an uptick, and contributes 60-65 per cent to overall volumes for top brokers, show estimates.

Full-service brokers are also moving into the discount space. Axis Direct has introduced India, Trade@20, which allows retail investors to trade at Rs 20 per trade, irrespective of the value. Angel Broking’s Angel iTrade plan seeks to provide premium services at price points of Rs 15 and Rs 30 per order.

“The financial performance of the sector will continue to remain under stress as traditional brokers with credible names like Axis Securities and Angel Broking have moved to fixed/subscription-based business models. We believe this can lead to further decline in yields,” noted the HDFC report.