World over regulators are working towards attracting more investors to the bourses, be it small or big. Various measures are taken in order to increase volume on the bourses, which not only helps the exchanges but also the participants by increasing liquidity and thus reducing transaction costs.
Somehow this simple fact has not been registered by India's market regulator, Sebi. In a move which makes little sense, the regulator has asked exchanges to discontinue mini derivatives contracts. The rationale being that the move will prevent small and retails investors from the risk associated with these instruments. Why did Sebi then allow trading in these instruments launched in order to attract retail investors?
On the one hand, the regulator allows contract sizes of future contracts to be reduced to Rs 2 lakh every time stock prices rise so that retail investors can participate. Now the same regulator wants to ban a contract which was cheaper to trade and limits losses for the trader. It is nothing short of childish to assume that just because mini contracts are not traded an investor will stop trading in derivatives altogether.
World over smaller contracts have caught the fancy of retail investors. Success of E-mini S&P contracts resulted in exchanges launching smaller contracts to enable retail players to benefit from the market.
Sebi's assumption that retail investors trade in smaller contracts only is faulty. Volume in mini Nifty contracts were in the range of Rs 200 crore every day (both futures and options put together), Nifty futures and options attract volume of nearly Rs 90,000 crore, out of which futures account for only Rs 5,000 crore.
Data available from the exchanges show that both domestic and foreign institutional investors account for only 30% of the derivative volume. The remaining is contributed either by proprietary trades, arbitragers or retail investors. Results of broking firms listed on the bourses show that a major portion of their revenues come from brokerages earned through retail trades in option contracts.
Most of the trading in the exchanges takes place in option contracts. Nearly 90% of the exchange volume comes from option trades. This is where retail and a small player trades. Capital required for each trade is much smaller, compared even to a mini Nifty, plus the risk reward ratio is any day better in an option contract. Retail investors lose a lot of money in option trades rather than in mini Nifty.
The move by Sebi will only help brokers who will end up making higher brokerages on the bigger Nifty contracts. The move will in no way prevent small investors from coming to the markets. If anything Sebi has exposed them to taking higher risks.
