Why Stocks Fell: The Report on Weekly Derivatives
On Thursday, BSE stock dropped by 4.26% to ₹2,170 per share, its lowest level since September 3 this year. Angel One stock also tumbled 5.32% to ₹2,212.3 per share. These drops occurred despite the benchmark Nifty 50 index showing a slight advance of 0.14%. Another related stock, CDSL, also experienced a 1.07% decline. This sharp reaction highlights the market’s sensitivity to potential changes in trading rules, especially concerning derivatives.SEBI’s Major Plans for Derivatives Market
The market regulator, Securities and Exchange Board of India (SEBI), plans to issue a consultation paper within a month. This paper will propose ending weekly futures and options (F&O) contracts. The goal is to transition to monthly expiries, meaning traders would have fewer, longer-term contracts instead of frequent weekly ones. SEBI might also consider having all derivatives expire on the same day across different exchanges.Curbs on Retail Participation Proposed
The consultation paper is also expected to suggest limits on retail investor involvement in the derivatives markets. This could mean setting specific financial thresholds for who can participate in these higher-risk products. This move aligns with previous statements from SEBI Chairman Tuhin Pandey. He has emphasized the need to increase the tenure and maturity of equity derivatives contracts. “The aim is to deepen the cash equity market, which forms the true foundation of capital formation,” stated Pandey last month. He believes a stronger cash market, not just derivatives, is vital for economic growth.Understanding the Impact of Curbs on Weekly Derivatives
Ending weekly derivatives contracts would have significant repercussions for exchanges like BSE and brokerage firms like Angel One. Weekly contracts generate frequent trading, leading to more transaction fees for these companies. Fewer, longer-term contracts could mean reduced trading volumes and, consequently, lower revenue from brokerage and exchange fees. This directly explains why their stock prices reacted negatively. For retail investors, the proposed curbs mean less opportunity for short-term speculation. While this might reduce potential quick gains, it could also shield them from the high risks associated with frequent, short-term derivative trading.Dr. Ananya Sharma, a Capital Markets Strategist, commented, “Limiting weekly derivatives could be a necessary step to foster a more mature and stable market, encouraging fundamental investing over short-term speculation. This aligns with global trends favoring deeper cash markets.”
Recent Changes: Expiry Day Swap
It is worth noting that trading patterns have already shifted recently. NSE’s Nifty contracts now expire on Tuesdays, while BSE’s Sensex contracts expire on Thursdays. This change was designed to redistribute market share in index options trading, potentially allowing NSE to reclaim some lost ground.Key Points: Curbs on Weekly Derivatives
- Stock Drop: BSE and Angel One shares fell by 4.26% and 5.32% respectively, due to reports of potential regulatory changes.
- SEBI’s Proposal: A consultation paper is expected to propose ending weekly futures and options (F&O) contracts.
- Monthly Expiries: The regulator plans a transition to longer-term, monthly derivative expiries.
- Same-Day Expiry: SEBI may also consider standardizing expiry days across all exchanges.
- Retail Investor Curbs: Proposals include setting thresholds for retail participation in derivatives to manage risk.
- Deepening Cash Market: SEBI aims to foster long-term investing and strengthen the underlying cash equity market.
- Market Impact: Less frequent derivatives trading could reduce transaction fees for exchanges and brokers, explaining the stock downturn.
