The relaunch is a fresh attempt by the exchange under the new management led by Sundararaman Ramamurthy to revive its fortunes and capture a pie of the market share dominated by rival NSE. But brokers, traders and market participants are doubtful if this fresh thrust alone will be enough to bring the listed BSE back into the game in a big way.
BSE’s weekly derivative contracts based on the Sensex and Bankex began trading on Monday. The highlight of the relaunched products is that they will expire on Fridays. NSE’s most popular weekly contracts – Nifty and Bank Nifty- expire on Thursdays. BSE is hoping that a different expiry day could prompt some traders who are Nifty regulars to try out Sensex contracts.
Various stockbrokers are likely to launch Sensex derivatives on their platforms over the next few weeks. Industry officials said there have been few enquiries from clients so far.
The prime concern is lack of liquidity – considered the lifeline of exchange business. Market liquidity- the ease at which securities can be bought and sold at the lowest price – tends to be sticky and shifts to alternate options mostly due to loss of confidence.
“It’s a chicken-and-egg situation for BSE,” said Jimeet Modi, founder of Samco Group. “At the end of the day, it’s the retail and institutional traders who bring in liquidity. The issue is that they want to first see organic liquidity and low impact costs before they come in.”
Currently, NSE dominates the equity derivatives market in India after managing to edge the older rival out of the game over the past three decades. BSE had introduced equity derivative contracts a while ago and had tried various ways to break NSE’s grip on the segment. The exchange had launched the liquidity enhancement scheme in September 2011 for index futures and options and later extended it to stock derivatives. Under this project, brokers were given incentives to drive trader interest in these contracts.
In 2020, the exchange wound up this scheme, which was slammed by market participants as it failed to spur broader participation from retail and institutional traders.
As BSE gives Sensex derivatives another shot, experts are wondering how the exchange will manage to convince big brokers and market participants for their backing.
“It will be a Herculean task because BSE needs powerful market makers to create liquidity. Unfortunately, all those things have already been tried,” said Vijay Kanchan, a finance professor specialising in derivatives.
There are hurdles in the way of BSE loosening its purse strings as it did in the past. BSE is now a listed entity on the NSE and could face shareholder opposition if it tries to throw cash into a market-making scheme, said a senior broker, who is also an investor in the exchange.
“If BSE wants to compete with NSE, the only way to ensure it is to bring its bid-ask spreads below that of NSE, which is already quite low,” said a former senior exchange official. “Unlike in the US, where more than one exchange survives because of the regulatory structure, in India and other places, the winner takes it all.”
For Sensex contracts to attract liquidity, they should be different from Nifty derivatives, said brokers and traders. “The correlation between Sensex and Nifty is almost 98-99%,” said Modi. “This is a reason why traders might not feel the need to try out Sensex derivatives for now.”
Moreover, traders are so comfortable with Nifty and Bank Nifty that their values are imprinted in their minds, said Kanchan.
Chirag Kabani, a Mumbai-based professional trader and technical analyst, said BSE must try to launch low-value products that appeal to retail traders rather than trying to launch contracts similar to the Nifty.
“For instance, Sensex futures at one-tenth the current value will attract retail traders because they prefer to trade in Yes Bank at 16 than in MRF at 97,000,” Kabani said. “A lower bid-ask spread value because of the lower contract value could attract more retail traders and create liquidity.”