Weekly contracts that made India top options market has last trading day

By Savio Shetty

 

Wednesday will mark the end of the contract that turned India into the world’s largest options market. 

 

The National Stock Exchange of India Ltd. is discontinuing weekly contracts on the Nifty Bank Index of major lenders — derivatives that represented about one-third of total index options volume — as the nation’s regulator is seeking to rein in an industry that grew more than 40 times over the past five years. At the peak in February, overall options trading reached $6 trillion in notional value — larger than the size of the Indian economy. 

 

The surge in options trading boosted revenue for the nation’s two stock exchanges and attracted the biggest Wall Street firms. But concerns grew that households weren’t channeling their savings into the economy. After months of deliberations, the regulator in October introduced steps to curb the use of equity derivatives. Limiting the weeklies was one of them. 

 

 

“Derivatives regulations may have unintended consequences,” said Deven Choksey, managing director at DRChoksey FinServ in Mumbai, adding that the new limits may increase risk for traders and lead to more market volatility. Investors commonly used the cheaper weeklies to hedge for upcoming events, helping smoothen swings. 

 

Launched in May 2016 by the NSE, the nation’s main exchange, the weekly contract on the Nifty Bank Index became an essential tool as traders embraced short-tenured options. Witnessing steady growth, the bourse began similar contracts on the benchmark NSE Nifty 50 Index in February 2019. The competing BSE Ltd. offered weeklies on the S&P BSE Sensex 50 Index, the BSE Sensex Index and BSE Bankex Index of lenders.

 

The options frenzy went to a whole new level with the Covid-19 pandemic. Stuck at home with free time on their hands, millions of Indians opened brokerage accounts and started trading the contracts, which allowed them to bet on the booming market for smaller sums than stocks. 

 

Foreign firms including Optiver, Citadel Securities LLC and Jump Trading expanded in the nation, while a lawsuit by Jane Street Group against two former employees and Millennium Management over an Indian options strategy that allegedly made $1 billion riveted Wall Street. Index options volume on NSE more than doubled in each of the three financial years through 2023. 

 

While the exchanges and brokers flourished, it was a different story for retail traders: 93% of them lost money in equity derivatives during that period, an updated study by the Securities and Exchange Board of India showed in September. 

 

The following week, the regulator came out with the measures to curb speculation. Among them: Each exchange could have only one type of weekly option. The NSE is keeping those on the Nifty 50, while the BSE will retain those on the Sensex. Weeklies on the Sensex 50 and Bankex will also end this month.

 

That’s poised to hit revenue at the bourses and brokerages. NSE’s chief executive officer said in a conference call earlier this month that he expects a substantial decrease in derivatives volume. Nithin Kamath, founder and CEO of one of India’s biggest online brokers, Zerodha Broking, expects the measures to impact 60% of its trading in futures and options. 

 

The NSE did not respond to requests for comment.

 

Investors will now be reallocating their bets. Rishi Kohli, managing partner and chief investment officer for hedge-fund strategies at Mumbai-based InCred Capital, said he expects the volume to go to Nifty 50 weeklies, Nifty Bank Index monthly contracts and some single-stock options. But part of the trading will probably disappear, he added.

 

“I will definitely miss trading it,” said Vivek Gadodia, founder of algorithm consulting and development firm RBT Algo in Mumbai, about the Nifty Bank Index weeklies. “It was India’s first widely traded weekly derivative contract and made a mark for itself.”