SEBI's new move to cut retailers participation in F&O!

[Tejas Khoday]

The problem with physical delivery is that it is close to impossible to short-sell a stock in the Indian market. We have seen this in the cash segment. While a short-selling mechanism exists in theory, shorting stocks outside the F&O segment, except in day trades is impractical.

The short-seller must borrow stocks from some institution that holds it in the portfolio. This involves first, the willingness of such an institution to lend stock. It also involves paying interest, and having to buyback from the market to replace the stock and complete the trade.

The inability to short sell stocks in the cash segment causes less efficient price discovery. In stocks with low free-float, it can lead to a situation where trading stops, with near-zero volume and quotes that fail to reflect changes in the corporate's business situation. It can also lead to short-squeezes as in the bad old days of badla, where short-sellers cannot cover a trade. That is a classic manipulative situation where institutions with large holdings can control the price of a share.

The F&O segment was created to avoid such inefficiencies in large caps. This system has worked quite well. The premium/ discount between futures and cash prices are generally close to the cost of carry. By forcing physical settlement, the distinctions between cash segment and F&O are being reduced.

The likely result will be a reduction in volumes across cash and derivatives segment and a rise in bid-ask spreads. Impact costs are bound to rise. Institutions and large investors, which hold large portfolios of underlying stocks will also have an enhanced power to manipulate prices since they will effectively be the only short-players.

http://www.business-standard.com/ar...very-of-stock-derivatives-118042300171_1.html

I don't agree with you.

1. It's not like SEBI is banning derivatives, they're just introducing physical settlements. Those who want to square off their short trades before expiry surely can to avoid the risk of a short-squeeze and physical delivery.

2. Those old days are long gone because when stock derivatives were introduced, they knew this and have taken precaution by reducing chances of such manipulations by introducing position limits on the client level and broker level. They also have open interest limits and market-wide limits. The banned scrip mechanism works perfectly as stocks which have breached their limits will not be allowed fresh positions etc. These are measures which will continue even as we move from cash settlement to physical settlements.

3. So far the derivatives segment is designed more for the speculators than hedgers/arbitrageurs. Now, it's going to become a level playing field for all types of market participants. In developed markets such as the US, physical settlements is the norm so it's a natural progression.

4. One of the reasons Stock Lending & Borrowing has not taken off is because speculators/traders don't have a reason to borrow stocks and hence there was no demand for that at all so an eco-system never developed around that requirement. Physical settlement is a cornerstone which can really bolster the demand for it. When there is money to be made and retail traders can participate by wanting to borrow stocks, then even small investors won't mind lending them. This way the market will evolve to include smaller players too.

These are my strong opinions and I reserve the right to be wrong

 

[Tejas Khoday]

One potential reason i see is that the lot size is bigger for the retailer. If the lot size is uniformly 100 qty like US, that would have help. If the lot size is made 10 qty that would be wonderful.

With Rs.2 lakhs capital, now i am able to trade VEDL futures 6 lots (1750 x6 = 10500) intraday. If it is to be settled physically I should posses atleast Rs.30 lakhs plus.

That is if you let it expire.

 

[Tejas Khoday]

Obviously it is a huge disadvantage. what if I have a short position and unable to close it during expiry due to some unavoidable circumstances such as internet problem or software error? I will be slapped with huge penalty of short delivery and auction. Similar for long position also, how many retail trader have so much money in their trading account to take delivery of shares? and even if one has that amount of capital he/she will need to again sell those stocks to release margin which will attract huge STT because both buy+sell delivery trades attract huge STT. Not to mention the T+2 cycle which one has to follow, so 2 trading days wasted after expiry day.

Well, the regulation is passed with the assumption that there is enough administrative and software infrastructure to handle such situations. Yes, you're right, there may be one-off situations such as the ones you mentioned but that being said, regulations are formulated after discounting such factors. If you look at it from an Ariel view, it makes sense according to me. But the point you made about STT is noteworthy.

 

[Tejas Khoday]

what will happen to options? if this happens in options as well, then the days of OTM option writing on expiry day will be over which will be a nightmare for traders.

That's if you don't square off before 3:30 PM on expiry. It's that simple!

 

[soft_trader]

That's if you don't square off before 3:30 PM on expiry. It's that simple!

But if I square off before 3:30pm it is not becoming worthless. I know several traders who trade only on expiry day and write options at a price of 0.05 and let it expire on expiry day. In that way one can earn nearly 1% return per month. If one is forced to square off at 0.05 then it is an opportunity lost, and obviously brokers will favor this move because if one let it expire worthless then it will not attract brokerage but squaring off before 3:30pm will.

 

[Tejas Khoday]

But if I square off before 3:30pm it is not becoming worthless. I know several traders who trade only on expiry day and write options at a price of 0.05 and let it expire on expiry day. In that way one can earn nearly 1% return per month. If one is forced to square off at 0.05 then it is an opportunity lost, and obviously brokers will favor this move because if one let it expire worthless then it will not attract brokerage but squaring off before 3:30pm will.

Good point, but I guess something as small opportunities like 0.05 rupees cannot be considered a disadvantage so to speak. One has to look at it from the larger context of the evolution of derivative markets as a whole.

To be honest, the brokerage generated on expiry day by options sellers cannot be considered as a meaningful source of revenues. This is for your information. It is so insignificant as compared to regular trading that I can say that I don't have any vested interests in this matter .

 

[LOVEENAJYOTHI]

One has to look at it from the larger context of the evolution of derivative markets as a whole

Evolution should be allround , should begin with Facilitation/ Infrastructure.
You can not say learn driving first then we will build roads and vehicles.
Do we even have a decent trading platform affordable to retail traders ?
Hw many traders can fearlesslly wait till sqaure off time to close their positions in the glitch ridden, flawfull Indian Retail Market OMS ?

 

[superman]

But if I square off before 3:30pm it is not becoming worthless. I know several traders who trade only on expiry day and write options at a price of 0.05 and let it expire on expiry day. In that way one can earn nearly 1% return per month. If one is forced to square off at 0.05 then it is an opportunity lost, and obviously brokers will favor this move because if one let it expire worthless then it will not attract brokerage but squaring off before 3:30pm will.

How can you earn 1% per month by just 0.05 rs ! Margin required will be of NRML ,, Almost impossible,, 1% per month is actually a good return , you will beat most liquid , debt and arbitrage funds by earning 12% per year !

 

[bpr]

what will happen to options? if this happens in options as well, then the days of OTM option writing on expiry day will be over which will be a nightmare for traders.

yes options might get affected

 

[soft_trader]

How can you earn 1% per month by just 0.05 rs ! Margin required will be of NRML ,, Almost impossible,, 1% per month is actually a good return , you will beat most liquid , debt and arbitrage funds by earning 12% per year !

It is very much possible. Select stocks with high lot size such as adanipower, gmrinfra etc. Last month I shorted 25ce of adani power at 0.05paisa on expiry day afternoon. Lot size 20000x0.05= Rs1000 and margin required was around 70000 NRML. So more than 1% actually. You can easily do such strategies on stocks with large lot sizes post 1pm and you will get those at 5paisa.