As bears and bulls lock horns, the cost of carry soars, wrong-footing many.
There was drama in the equity derivatives segment on the last day of expiry of October contracts today.
The cost of carry (meaning, the cost of financing an asset) of Nifty futures and a large number of stock futures rose sharply during the last 30 minutes of trading – the highest in the recent past. Due to this, a large number of retail and some large foreign institutions were caught on the wrong foot, said market players.
While the S&P CNX Nifty spot index of the National Stock Exchange (NSE) closed at 5,987.7 points, the November series Nifty futures closed at a premium of 87.2 points at 6,074.6. Traders who wanted to buy the November series and sell the October series had to pay an interest of 14.6 per cent annually (according to NSE rules), over and above the money required to carry or hold a position.
Near-term hazy
“With record cost of carry, the situation is dicey for the market. It may witness sharp moves in the coming days, as bears and bulls fight,” said Deven Choksey, of K R Choksey Shares and Securities. However, brokers said the cost of carry for Nifty futures was as high as 17 per cent annually, as their calculations were not for the entire month but for the number of trading sessions. A higher cost-of-carry may indicate build-up of long positions.
Market players said in the absence of physical settlement in equity derivatives, a few operators managed to rig the premium of Nifty futures. Such high volatility during the last hour forced traders to let their contracts expire.
Stock futures where the cost of carry rose sharply included Reliance Media, IDBI, RIL, GAIL, Cipla, DLF, Cairn, HDIL and Century Textiles. The cost of carry for these stocks was 24-48 per cent annually.
“Not many people were able to roll over positions, as the gap between Nifty spot and Nifty futures widened dramatically. However, the markets seem to be in strong hands and building of short positions is not advised,” said Siddhart Bhambre, Angel Broking.
“Extremely low rollovers were witnessed. Some foreign institutional investors looking to sell short have been trapped by the bulls. Also, a large number of retail traders were trapped badly,” said Kishor Ostwal of Mumbai-based CNI Research.
While market players believed this huge premium between Nifty spot and futures was not justified, they were not sure enough to create short positions, as the cost of carry was high and they feared operators could trap them.
The market share of the Bombay Stock Exchange (BSE) in the cash segment also fell amid this frenzy today. While the turnover of NSE rose sharply to Rs 2.53 lakh crore, of which the cash segment turnover was Rs 24,832 crore, the turnover on BSE was merely 5,373 crore. The market share of the BSE cash segment fell from over 25 per cent to around 21 per cent.
However, industry players said BSE typically loses market share during the last couple of days of derivatives expiry, after which it returns to the previous position. “In a desperation to come out of their positions, traders mainly trade cash equities on NSE. It is convenient for them, as they save the margin money,” said a broker.
Brokers said physical settlement in derivatives would reduce this volatility during derivatives expiry. BSE plans to do so in December and has applied to the Securities and Exchange Board of India. NSE is perusing market feedback on the proposal.
Under the system, a seller of stock futures or options will have to deliver shares to the counter-party when the contract expires. So, operators will not be able to rig premiums by paying a little margin money. The pattern is followed by all leading derivatives exchanges around the world.
