Chhota-Sensex pitted against mini-Nifty

It's going to be a battle between 'Chhota-Sensex' and mini-Nifty as the country's two premier stock exchanges, the Bombay Stock Exchange and the National Stock Exchange, introduce mini-contracts on their key equity indices in the derivatives (futures & options) segment from tomorrow "� the New Year day.

BSE, which has lost out to NSE by a big margin in the derivatives trading turnover, is on an aggressive marketing pitch to attract traders from the day one. "Chhota-Sensex makes big Sense," says BSE's marketing campaign on the mini-Sensex.

But, experts say, mini-Nifty will face competition from Nifty itself, and not as much from Sensex. This is because the derivatives trading in Sensex, which is the most widely tracked equity index in the country, is very small compared with the daily trading volume in Nifty.

The average trading volume on Sensex futures is about Rs 1,000 crore, whereas the F&O volume on Nifty is over Rs 12,000 crore on a daily basis.

"Traders and investors will go to an exchange, where there is enough liquidity. BSE needs to generate sufficient volume on mini-Sensex on the first day itself," said a derivative analyst with a brokerage house.

The Securities and Exchange Board of India (Sebi) allowed the introduction of mini-contracts on Sensex and Nifty last week, which will help individual investors to hedge risks of a smaller portfolio at lower levels of risk in terms of smaller level of possible downside compared with a big size contract.

For instance, at the current level of Nifty, the value of one contract (where the lot size is 50) is above Rs 3 lakh. On a mini-Nifty, it will be Rs 1.22 lakh as the minimum lot size on the new contract is set at 20 by NSE.

Similarly, an investor on the Sensex contract currently pays about Rs 40,000-45,000 as margin per contract (market lot is 25). For mini-Sensex, it will be about Rs 8,000-9,000 (market lot is 5).

"Mini contracts will attract big volumes only if there is a significant arbitrage opportunity between the mini and the normal contracts," said Alex Mathews of Geojit Financial Services.

"Small investors, however, can find mini-contracts attractive as trading on the mini-Nifty will suit them," he said.

According to Mathews, there exists an anomaly in the mini-Nifty contract. "While investors can buy mini-contracts, there are no mini-contracts available on the 50 individual stocks that are components of the index. This will restrict investors from playing the arbitrage game between mini-Nifty and the constituents in the mini-Nifty index. We expect mini-contracts on the index constituents to be introduced in future to set right this anomaly."

Another dealer in a local brokerage house said BSE would continue to struggle to attract volumes in mini-Sensex derivatives, as most traders opted for NSE due to the big trading volumes on its F&O segment.

"BSE needs to attract big traders to its F&O segment. Once the exchange starts to generate big volumes, more and more people will begin to look at Sensex and mini-Sensex derivatives," he said.

Globally, mini-contracts are able to attract investors in a big way due to their higher liquidity and the ability to get in and out of a trade quickly with low impact cost.

Chicago Mercantile Exchange, one of the leading derivatives exchanges in the world, provides wide range of E-mini futures contracts on broad-based and liquid indices such as the Nasdaq 100, S&P 500, S&P Midcap 400 and Russell 2000.

For example, the E-mini S&P 500 futures contracts, which is one of the broad-based and most liquid contracts, is one fifth the size of the standard S&P 500 futures contract.