- NSE halves market lot size of derivatives contracts for Nifty 50
- Why the change and what are the implications on the market?
Here's what Alex Mathew, Samina Nalwala and Agam Vakil are discussing on today's 'The Editors' Cut'.
- Why the change and what are the implications on the market?
Here's what Alex Mathew, Samina Nalwala and Agam Vakil are discussing on today's 'The Editors' Cut'.
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TVTranscript
00:00 The INR is stable, but a lot of mechanics within the INR are not.
00:03 And Alex, I believe you are talking about what's happening on the derivative side
00:10 in a meaningful way on the equity end in the session today.
00:13 Absolutely. In fact, that is the focus today because of what was announced
00:16 by the National Stock Exchange yesterday. In fact, I would invite Sameera to join us
00:21 because this is a conversation that we're going to have with her as well on the Editor's Cut.
00:26 Let's break this down first to talk about what was announced today and what the implications are,
00:32 because there are a couple of scenarios that we will have to peer into. And we'll also talk about
00:37 who benefits or who stands to benefit the most. Agam, let's start with what was announced and
00:44 then we'll move from there. Sure. So what's announced is that
00:47 the lot sizes for three of the derivatives on the NSE have been reduced. So the Nifty 50 contract
00:55 will reduce from 50 to 25. The Fin Nifty contract will reduce from 40 to 25. And the Mid Cap Select
01:05 Nifty contract will reduce from 75 to 50. Correct.
01:09 Well, the effect will come into place on the 26th of April. That is one day after the 25th April
01:14 expiry. And this will be valid for the July 2024 contracts going in. The reason why they've taken
01:21 it up is, of course, this is an exercise that exchanges take every six months. And well,
01:27 from what we understand is that SEBI has given a notional size for each contract to be within
01:34 5 to 10 lakh rupees. And considering the Nifty has run up so much and it is sustaining well above
01:41 the mark of 22,000, 22,500 at the moment, of course, it does seem like exchanges think that
01:47 it's a good time to buy. What is the notional value right now?
01:50 So at the moment, the notional value of the Nifty 50 is about 11, 11 and a half lakh rupees.
01:55 11.09. But very quickly, Agam, you said this is a biannual revision that the NSE undertakes.
02:01 When was the last time that they actually significantly reduced their contract size?
02:05 So, well, the last time we saw a change was in fact, the Nifty moving from 25 to 50.
02:11 And when was that? This was about five or six years ago.
02:14 This is a big, significant move, even though it's business as usual.
02:19 It certainly is. But it's for good reason because we have seen the Nifty move up substantially as
02:24 well in the last five or six years. So, yeah, that's that's that's that's last year.
02:29 The long and short of it, if you can call it that. But let's talk about implications.
02:33 And I guess to a certain extent, Agam, we're going to have to and Samina, we're going to have to
02:36 build out a few scenarios. But let's talk about beneficiaries first. On the face of it, seemingly,
02:42 the exchanges and the brokerages have. Absolutely. Always. The house always wins.
02:47 Well, so, of course, it's going to lead to a better, better liquidity. And this will also
02:52 lead to a lot of institutions perhaps be able to more finely manage their risk because you just
02:57 have that much more granularity since you have smaller lot sizes. And the real question is
03:04 whether or not, you know, your institutions and retail participants benefit. Sure, the lot size
03:10 is very attractive. Yeah. But it'll also come down to several costs. So therefore, and we'll come to
03:15 that in just a bit. But on the opposing side, we've seen BSE make some big moves. Yeah. To their
03:21 betterment. And we've seen that reflected in the stock price, which is up 500 percent, over 500
03:26 percent over the last 12 months. Yes. I think the one house that may lose, yes, at least sentimentally
03:30 this morning could be BSE. Of course, now, just to put this in perspective, NSE is in a different
03:36 league altogether. There's no way you can compare the two. But let's not forget BSE is listed. NSE
03:41 is not. So if you want to play the exchange game, you want to play the India equity story,
03:46 your only way to do it is for the BSE. Now, just to put some numbers in perspective, NSE,
03:51 like Agam said, is half their contract size on the Nifty 50 from 50 to 25. This move also comes in
03:57 to sort of keep up with what you have in terms of the Sensex contract size. The average Nifty
04:02 contract after this change comes down to 5.5 lakhs, 5.5 lakhs versus 11.09 lakhs, which is
04:10 what it was when it was 50 units, so 50 shares in terms of a contract as compared to Sensex,
04:16 where the unit or the lot size is 10 shares. The value of it is about 7.5 lakhs. So if you're
04:22 comparing in terms of value, volume, liquidity, BSE is at seven and a half. You've got now NSE,
04:29 which is at 11, coming down to 5.5. So this change could be also viewed as moving or keeping
04:36 competition at bay, right? We've maintained NSE is a leak in itself, but nevertheless, BSE is
04:41 gradually inching up. Last Jan, when they had the new CEO come in, there were a number of changes
04:47 that were undertaken, one such being that Sensex weekly expiry was moved from Thursday, which is
04:52 when you have the Nifty weekly expiry, to Friday. So they wanted to keep that separately and that
04:57 worked out really well for BSE. And they saw a massive... And they've got an expiry on several
04:59 days of the week. Yeah, and they saw a massive bump up, right? So if I've got those numbers
05:03 right, the average daily derivative turnover on BSE rose to 34.6 trillion in FY24 versus 1.38
05:13 trillion from a year ago. So while I said, two different base, BSE is still really small,
05:19 but someone could view this as a move of NSE to continue to maintain its leadership.
05:23 Yeah, I remember very quickly that for a few weeks, the NSE had decided to keep the Bank Nifty
05:32 contracts expiry on Friday. But they took it back because I believe that BSE had come in and
05:38 requested, you can't do that because we already have the Sensex expiry there. So please, you know,
05:44 you're going to have to take a step back, which is after that, it was decided to pull it back on
05:50 Wednesday. Let's talk about the last implication, because I think to a large extent, a lot of people
05:56 interpreted this as resulting in significantly higher volumes. However, I think the kingpin or
06:03 the deciding factor is going to be the cost of each contract. Yes, I already explained that.
06:09 And I think this is going to be the most important aspect to watch out for. Currently, a contract in
06:16 an options market, a charge, well, on an average is about 20 rupees per lot size. If the brokerages
06:24 decide that they do not want to change or reduce their contract or brokerage overall, that means
06:30 instead of paying 20 rupees for a 50 size contract, now we're going to pay 20 rupees for a 25 size
06:36 contract, which means that for a 50 size contract, or rather two contracts, you're going to have to
06:41 pay 40 rupees. All right, this really doesn't become a huge amount of an issue when you actually
06:47 sit and write your at the money options, because there the premiums are relatively larger. But when
06:53 you start moving out of the money slowly, steadily, that's when big option premiums becoming
06:57 smaller and smaller. And the further out you go, the less option premium that you will see at one
07:02 point in time, it will be very, very, I would say it won't be lucrative at all if you actually go
07:08 ahead and sell those. Could one interpretation of that be that we will see lesser volatility?
07:13 Could that lead to lesser volatility? Yeah, so it may or may not lead to lesser volatility.
07:20 I think I think of it as a positive, sure, it will certainly reduce the the kind of traction that
07:25 we see on tail ends. But the fact that you're not getting to write those options anymore,
07:31 also reduces the overall risk of the system. Because when you write an option, you are also
07:39 taking on unlimited risk, theoretically. And that of course reduces. And this goes back to
07:44 what the regulators wanted. Remember a couple of weeks ago, we were talking about all that froth
07:49 across the broader market. So this also could be on the lines of reducing risk, saving,
07:54 I mean, protecting retail investors. But very quickly, how does this compare to the BSE costs?
07:58 And I think this is going to be a sentimental negative on BSE, by the way, this morning.
08:02 It wouldn't surprise me if the stock sees a gap down on back of NSC's move to half contract size.
08:07 So brokerages remain the same for BSE contracts as well. And in this case, of course, again,
08:14 it's going to come down to, you know, the fact remains that BSE option market is still not very
08:21 liquid. So it's going to be that's also something is going to be a waiting.
08:24 So and that kick this kicks in 26th of April for the July contract. Yes. So we'll have to
08:30 watch how these pan out over a period of time. And remember, the most important point is whether
08:34 or not the price of a contract, the cost of a contract will change. So we'll have to probably
08:39 speak to a few brokers and see what their reaction is going to be.