Can you explain how Sebi measures to curb F&O trade frenzy will work? Suppose a Nifty contract was available for 50,000 or 60,000, how much will a retail investor have to pay now so that that intent which Sebi has shown will be implemented?
Nooresh Merani: Initially, we had 25, 50, 75 as the sizes for Nifty or 100. Given that the minimum requirement is Rs 15 lakh, it implies you have to have more than 60 as the contract size. So ideally it will go to 75. That implies whatever your size is, it will increase by 3x. So, if your margin was Rs 50,000, now the margin requirement will be Rs 1.5 lakh. Same way, earlier, contract size would imply Rs 6, 6.5 lakh as the total notional value. Now that will be closer to Rs 18 to 19 lakh. So, it implies a 3x change in terms of the contract size for Nifty at least.
But most importantly, the market was already down for the last two days, anticipating the same. How do you see the impact today?
Nooresh Merani: I do not think there is an impact on the markets per se because if you look at it, this is only on the index derivatives and there is good enough time given. We have also seen a 50% cash margin come in. We have also seen 1700 stocks get out of the pledge and become 650, 670, that gets finally done by 1st November. We did not see any impact. Those had a much bigger impact.
Out here, there could be price impact on some brokers, broking companies, exchange companies, because those are the ones which get hit the most because suddenly from every day being an expiry, you just have one in a week. Also, the volumes will get lower. So, it would be more a stock-specific impact and not, say, an index impact. Plus, this was very much needed because 94% of the traders were only trading options as per the data which implies very low-margin retail clients, so there was a need to increase the margin size so that the low retail margin guys do not come into play. But I do not think there is a major impact on the markets as such, but yes, some stocks would be impacted.
As far as the specifics are concerned, one of the impacts is the rationalisation of weekly expiries. Right now, there are many options for the traders to do that every week. But if that will be rationalised, the weekly contracts will be limited. How will it impact the exchanges? Will the volumes drop?
Nooresh Merani: Ideally, the volumes should drop. But a large part of the growth which came in BSE and NSE over the last couple of years, came from options. BSE was not very active in options, and now they have got into options. So, they will be impacted. And the fact that there were five days where there would be expiries, now there will be just one in a week, that implies there has to be a reduction. How much is a quantum is tough to say as of now because the volumes did not increase 5x in a jiffy when we went from one weekly expiry to five.
Nifty and Bank Nifty have been the most traded ones. So, there would be an impact. It is tough to call. The last we know is there was an article by one of the discount broking companies, Zerodha, wherein it said there could be a 30% to 50% drop, which is generally an exaggeration. But yes, there has to be some drop. It cannot be safe.
The data said that 1% of algo traders were making money and some of them were based outside India. But now, do you think after these norms, that kind of balance may change?
Nooresh Merani: The balance generally does not change. In a speculative instrument, 80% of the people lose money, 20% make money, the Pareto principle remains the same. But in this case, a lot of people were participating in Indian markets. When you look at it, say, 43% of the total traders who were trading in individuals on derivatives were below 30 age, so you had youngsters, the largest amount of growth came from states which were not generally the big participants before.
Almost 94% of the participants are trading in only options. It tells us that if we reduce the number of expiries, the volumes go down and there are lesser places for retail traders to lose money, so the balance may not change. There has been an increase in STT, etc, so there will not be a major change for STT as well. There could be a little change for brokers and exchanges, but all in all, a higher ticket size is generally a good way to reduce. This has been done in Korea also before. The volumes could not drop a lot because you have just increased by, say, from 5 to 10 lakhs to 15 lakhs, so overall, it is a good thing that retail traders will start shifting more towards direct equities. Derivatives are not for any low-ticket retail trader.