If the market is not conducive for investment, speculate was the formula of global investors in 2011. This is reflected in turnover data of exchanges globally, as culled from the World Federation of Exchanges (WEF). Derivative trading data across the globe suggest that trading in index-based options grew, despite cash market volumes shrinking. And, even within derivatives, volumes other than in index options showed no significant rise.
The data showed equity cash segment volumes remained stable despite a fall in market capitalisation. The number of contracts traded in equity derivatives grew 9.4 per cent as speculators increased their presence in derivatives, especially in stock index options.
Total turnover value in equity markets remained stable in 2011 at $63 trillion, despite a sharp decrease of global market capitalisation (minus 13.6 per cent, to $47 trillion). Within derivatives, stock index options had the highest share, of almost 40 per cent, and it grew by 14.5 per cent compared to 2010. Stock index options have seen growth of 8.2 per cent, while single stock options (28 per cent share in total derivatives) saw a fall in volumes by 0.5 per cent. Options in the exchange traded fund segment saw a 33 per cent jump but it is still less then 12 per cent in total derivatives.
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Santosh Singh, analyst with the Indian arm of global investment major Espirito Santo, said, “We have seen one of the most uncertain periods of recent times, which began from 2008. In times of uncertainty, institutional investors usually prefer to trade in options.” He also observed that in uncertainty, investors stay invested and portfolio churning also comes down in the cash segment.
He said they used options trading to stay floated and give returns to investors, as the market was moving on both sides and volatility was very high.
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An analysis by WEF suggests an increase in derivatives volumes seems logical, as hedging needs were probably driven upwards by volatility. The relative preference for indices over single stocks could be interpreted similarly. The number of on-exchange futures and options contracts traded in 2011 increased nine per cent to 18.5 billion. Increased trading in stock index options led the gains, as high volatility and uncertainty over the sovereign debt crisis continued to increase risk management needs.
India’s National Stock Exchange (NSE), the second largest in the world in terms of contracts traded in stock index options, has been the fastest growing exchange, with a 64.4 per cent increase in contracts. The Eurex Exchange, ranked second in the world in terms of total equity derivatives contracts, saw a significant 36.6 per cent increase in single index options contracts. The Korea Exchange, the world’s biggest in terms of stock index options and total equity derivatives, witnessed only marginal growth in contracts.
Sanjeev Prasad of Kotak Institutional Equities said, “Most institutional players have a huge prop book and they trade in the options market, as options are cheaper instruments. They take risks in writing options, while retailers buy options.”
NSE managed to remain second in the world in index options due to the very high growth of 64 per cent in the segment. Santosh Singh, however, said India’s options market was shallow in terms of absence of a liquid longer-period options market, which was not the case globally.
The only change in 2011 in the top 10 exchanges by market capitalisation was the Australian Stock Exchanges reaching 10th rank. The Indian exchanges are no longer part of the top 10, as their market capitalisation fell dramatically (less 38 per cent in dollar terms). This trend has been reinforced by foreign exchange variations, since their market capitalisation only fell by 26 per cent in rupees.