Retail presence in derivatives on rise

As markets have remained unidirectional, retail investors seem to be punting more heavily on the bourses. The share of retail participants in the derivative segment has been on the rise over the past six months.

This has apparently raised concerns among regulators, prompting them to increase margins twice within a month.

According to data sourced from the National Stock Exchange, the contribution to derivatives turnover (gross traded value) from retail investors for the month of March stood 66 per cent, up from 60 per cent in October 2005.

While share of proprietary position of brokers has declined from 32 per cent to 28 per cent during the same period, that of foreign institutional investors have remained largely stable at around 7 per cent.

"Retail participation on the derivatives market has been rising as the market has been trending in one direction making it easier for traders to make a quick buck by speculating on the future segment," said Hemant Thukral, senior derivatives analyst, Anand Rathi Securities.

The continuous rise in the retail participation in the derivatives market has been worrying the regulators.

"Several retail investors and brokers have been funding their margins by way of a line of credit from banks and other lending institutions which means they have positions way above their actual capacity," Vijay Bhambwani, CEO, BSPL India.

Since foreign investors have deep pockets and can cough up the required margins, the higher margins are essentially an attempt to discourage the weaker players from taking heavy exposure in the derivatives segment.

Higher margins coupled with higher level of uncertainty in the stock markets is making things difficult for short term traders. "Trends do not seem to sustaining.if it is technology for a couple of days, it is FMCG the next day, and a third sector the following day..."adds Bhambwani.

In the coming days, retail investors could be expected to cut positions since they may not be able to sustain positions with higher margins coming into play. Currently, margins on stocks are around 20-25 per cent on an average.

This is likely to do up by 2.5 per cent as the exposure margins will be hiked to 10 per cent from 7.5 per cent now after April 28.