The market regulator and the stock exchanges seem to have lost their initiatives in derivatives trading after the end of 2001.
Given the phenomenal growth of the stock market in India, in recent times and its emergence as one of the favorite investment destinations on the radar of the Foreign Institutional Investors (FIIs), there is no denying that Sebi's achievements so far are very impressive. However, the market regulator and the stock exchanges seem to have lost their initiatives in derivatives trading after the end of 2001. One indication of the lack of initiative is the drastic fall in the volume of trading in the derivative segments. From a maximum of Rs. 22,000 cr it has tumbled down to Rs. 7,000 cr at present on the average. Why?
Derivative contracts were introduced in June 2000 with a notional value of Rs. 2,00,000 when markets were under the firm grip of the bears. Tata Motors was quoting around Rs. 60 per share and 3,300 shares were fixed for a single lot. Similarly, 1,800 shares were fixed for TISCO. For Reliance 600 shares were fixed and for Satyam 1,200 shares. Notional value of a contract was arrived at to reduce too much speculation by retail investors. By fixing the contract size at the higher end it was presumed that only financial institutions and high net worth individuals would indulge in trading in the derivative markets. But, it so happened that retail investors got wind of the leveraging advantages of options and futures and as a result, a large number of investors turned to trading in the derivative segments. By the beginning of 2004, Sensex soared to 6250 levels and NIFTY to 2015 levels. The price of Tata Motors rose to Rs. 600 and TISCO to Rs. 500. Reliance went up to Rs. 600. As the share prices soared to Himalayan heights, notional value of the contracts in these scrips rose to huge amounts. The notional value of one contract for Tata Motors became Rs. 20,00,000 and the margin requirements grew proportionally. To buy one futures contract of Tata Motors a trader needed around Rs. 3,00,000 as margins. Because of the high volatility of the prices of Tata Motors, Satyam, TISCO, Reliance and SBI, most of the traders were after such scrips. However, no retail investor could sell the options because of the enormous requirement of margins demanded by the exchanges. Similarly, buying a futures contract on these scrips also became impossible for ordinary traders. |
