Proprietary trades in derivatives by brokers constitutes 47% of volume

Proprietary trading by brokers in the derivatives segment amounts to more than 47 per cent of the total trading volumes in the market. Trading on client's behalf, however, still forms the majority of the trading at 51.4 per cent.

According to data furnished by the Securities and Exchange Board of India (Sebi) to the Ministry of Finance, proprietary trading volumes in derivatives were at 47.04 per cent of the total turnover in August 2003, while this has marginally declined to 46.84 per cent in September.

However, trading on behalf of clients actually saw a decline from 51.38 per cent in August to 51.05 per cent in September.

In fact, proprietary trading has been declining over the months. In July, it made up 48.15 per cent of the total traded volumes, while in the case of client trading, it was slightly more than 50 per cent.

Sebi has done an analysis of the trading pattern in the derivatives markets by the participants and contrary to popular perception, the participation of foreign institutional investors is considerably low.

There has been a slow increase however over the months. From 1.55 per cent in July, the share of the FII trades in the total trading volumes has increased to 1.58 per cent in August and to 2.11 per cent in September 2003.

According to Sebi, the major share of the volumes in the derivatives market is on account of trading by retail investors and proprietary trading by brokers.

"Like FIIs, it would be reasonable to infer that the retail investor positions and the proprietary trading positions of brokers include arbitrage transactions," Sebi said.

In the absence of an arbitrage opportunity, says the Sebi analysis, there may be withdrawal of funds by FIIs, retail clients or brokers from the arbitrage activity.

Navneet Bansal, associate vice-president (derivatives) at Kotak Securities, said, "Most of the day traders (in the cash segment) have moved into the derivatives segment in a big way."

Ashok Mittal, who heads derivatives at SSKI adds, "It is the reverse case in the derivative market. The retailers are creating the market for institutions."

A secular stock trend in the last six months is getting traders higher returns in the derivatives market at a smaller outlay than in the cash markets.

Net gain from the arbitrage business, playing for differences between the cash and derivatives markets, is estimated at 8-9 per cent.