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Futures market potential lies untapped

NetScribes/Salil Panchal

The Indian futures market is slowly gaining speed. Volumes have more than doubled over the past two months at both the BSE and NSE - an indication of increasing liquidity.

However, the market is still dominated by high networth individuals and smaller brokers, with the institutional investors preferring to adopt a wait-and-watch attitude.

Liquidity in this market can be measured by the open interest position for derivatives contracts. 'Open interest' denotes the net outstanding position for contracts in a particular month, that is, contracts that have not been closed at the exchange.

At the S&P CNX Nifty futures market, the open interest position for one-month contracts moved up from 250 in August to 702 in October. At the BSE Sensex futures market, the open interest position now stands at 690 contracts, as against 350 in August.

"The increase in the open interest position means that a lot of market players are willing to take a long term view on the market," said R Sundararaman, assistant vice president in-charge of derivatives and capital markets, NSE.

The only cause for worry is that institutional support is still not very strong. Currently, with domestic financial institutions and foreign institutional investors still staying away from the market, the investor community in the Indian futures markets comprises largely of high-networth individuals and retail investors.

This is reflected in the low volumes in this market as compared to turnover in daily stock trading. For value date October 18, 136 contracts worth Rs 3.13 million were executed at the NSE.

One of the biggest concerns is that the Indian retail investor still prefers to look at the futures market from a theoretical point of view rather than use it as an active tool to speculate on trading levels for index-linked products.

Over the past three months, volume trends reveal that higher the volatility in the markets, the higher is the derivatives trading volume. "This need not always be the case, as investors must understand that one can get strong returns in smaller volatile spreads," Sundararaman said.

In the trading period of 10:00 am - 3:30 pm on Wednesday, the S&P CNX Nifty moved upwards 25,095 times, while downward movements were witnessed 25,941 times. This clearly shows that there are several opportunities where the trader can take a short-term trading view of even a few minutes.

NSE officials believe that for derivatives trading to succeed at the markets, the product would have to find favour with the retail investor.

The opening level of S&P CNX Nifty futures for October contract stands at 1,172, and for November it stands at 1,181. The BSE Sensex futures level stands at 3,785 for October, and 3815 for November contracts.

Market players can either invest in a BSE Sensex or a Nifty futures by buying or selling the index, hedge their risk by taking a counter position in the futures market, or merely arbitrage by taking advantage of the price differential between the cash and futures markets.

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