Low institutional activity in index stocks, the arbitrage opportunity afforded by derivatives and their comparatively less risky nature at present are weaning retail investors away from the cash markets.
This, in turn, is restricting the major indices -- the Bombay Stock Exchange sensex and the National Stock Exchange S&P CNX Nifty -- to a narrow range.
On the other hand, the broader market barometers, the BSE 200 and Nifty 200 -- comprising mid-cap stocks -- have fared better.
While the sensex has shed 0.30 per cent from 3288.71 on July 1 to 3278.71 today, the BSE 200 has lost 0.07 per cent from 398.08 to Monday's 397.80.
Similarly, the Nifty lost 1.96 per cent during the same period, while the NSE 200 shed 1.78 per cent.
Jignesh Shah, strategist, ASK Raymond James, said "Dearth of institutional buying in index stocks in the cash market keeps retail investors away because they would not prefer to take risks when the Pied Pipers (institutions) are not to be seen."
The retail investor normally follows the trading patterns of institutions on the bourses. In such a scenario, if the retail player has a hedging option -- such as the derivatives, which includes both futures & options -- he would rather put his money there.
Moreover, the premiums in options and end-of-month futures (closing price or maturity value) also provide a cover against risk.
"To cap it all, the retail investor has to put in less money compared with what he would have had to shell out to buy the same lot of shares in the cash market," Shah said.
In July, volumes in derivatives surpassed the volumes of the sensex shares in the cash market, indicating that the low liquidity in the latter segment is keeping the indices under check, a derivatives dealer said.
On July 1, the sensex stocks clocked a volume of Rs 743 crore on the National Stock Exchange (NSE) cash market, while the same shares logged a volume of Rs 922 crore in the derivatives segment of the exchange.
The volume gap between the cash and the derivatives segments have been continuously widening. On July 15, the sensex stocks clocked a volume of Rs 809 crore in the cash mart, while the volumes were at Rs 1,095 crore in derivatives.
This is also partly a result of the arbitrage opportunity within the derivatives family, a derivatives dealer explained.
