Investors pump up F&O action, skip cash

11 Oct, 2007, 0230 hrs IST,Apurv Gupta, TNN

MUMBAI: It appears to be a case of the tail wagging the dog. The hype around the India growth story notwithstanding, the futures and options segment has been seeing more action than the cash segment in the past few months. And some market observers feel that the movement in the Nifty and many other stocks is driven by the activity in their futures.

In the recent market rally led by select big-cap stocks, the surge was largely restricted to the derivatives segment. Market watchers add that retail investors are not very active in these counters and a large part of the turnover in these shares is due to speculative positions built up in the derivatives segment.

The monthly average daily cash market turnover has gone up from around Rs 8,400 crore in April to around Rs 13,300 crore till September this year. However, during the same period, the monthly average daily derivatives market turnover has shot up from around Rs 31,000 crore to over Rs 53,000 crore. The daily average derivatives turnover is around Rs 75,000 crore, while the cash market turnover has climbed to around Rs 19,500 crore from October to till date.

“Generally, most traders try to ape what the institutional player —notably the foreign investors — are doing,” says technical and derivative strategist Viral Doshi. “There is hardly any retail participation in the stocks that have been leading the rally. It is only speculative positions in the derivatives market that follow after the institutions buy in the cash market.

For example, if there is Rs 1,000 crore worth of buying in the cash market, it is followed up with 3 to 5 times turnover in derivatives. Clearly, market participants are leveraging on the momentum,” he adds. Experts add that while the number of stocks available for trading in the F&O list has boosted the overall turnover, many of them are inactive. Cash market turnover has grown significantly as many companies have issued large equity, using different routes like private equity, preferential allotment, rights issue and initial public offerings.

Some of the recent IPOs have attracted such frenzied activity that they figure prominently among the most-traded stocks till a few days after listing.

The number of stocks in the derivatives segment has gone up substantially in the past one month. The increased liquidity in the options segment is also increasing investor interest in them as liquidity begets liquidity, though many stocks options are still not very liquid. Almondz Global Securities technical analyst and derivative strategist Gurudatta Dhanokar says, “Out of the over 200 stocks in the segment, there is significant interest only in 70-100 stocks. Though in futures, this number ranges from 150 to 180, in options, only 30 to 35 stock options are liquid.” Experts also attribute the increase in derivatives market turnover to heightened arbitrage activity due to volatility in the market.

“There is an increase in arbitrage opportunities due to a volatile market. However, this could backfire if volatility increases further, as a few players possess the knack to execute arbitrage trades in volatile markets,” adds Mr Dhanokar.

source: The Economic Times