BOMBAY, 2 July — The coming week will go down in the annals of Indian stock markets as aground-breaking one. For July 2 marks the end of the age-old trading technique of badla. It also marks the beginning of a new page in trading on the Indian bourses by ushering in Futures and Options.
Still a majority of the investors feel that banning badla would be detrimental. Many know nothing about futures and options, and majority of the traders feel that it is too intricate a trading technique and have a mental block about learning it. It is precisely this pessimistic mood which is being reflected on the Indian stock markets for the past days with consistently falling indices. Most of the stocks are currently being quoted at absolute rock bottom prices, yet no one seems to have the inclination to buy them. There is a sense of premonition that things are going from bad to worse.
In such a situation, should one look at July 2 as doomsday or as a harbinger of better days ahead? Majority of the traders seem to have this mind block that Indian markets just cannot survive without badla and fear a further fall in liquidity. But there are quite a few of the “learned” brokers who feel that futures and options will give the much needed “international” face to the Indian markets.
Yes, the initial days after July 2 will be tumultuous, something like the churning of the sea, but finally there will be calm and this pull between the contemporary and the modern will settle down. Many analysts are of the opinion that as almost all the long positions have been liquidated, there will be lot of buying after July 2 and the Sensex is expected to touch a level of 4,000 within six months.
A lot of activity is expected to happen in the B1 group which is not a part of the rolling settlement. From July, 414 stocks (including all A group scrips) will be traded in the T+5 rolling settlement mode, with the remaining listed scrips expected to be shifted by the end of this year.
Another change is that there will be day-to-day trading and not the usual weekly-trading. Volumes will most certainly take a dip and will remain a constraint for some time but once the derivative products pick up, volumes in the cash and derivatives market are expected to touch a level of around Rs. 10,000 crores.
Margin trading will also be ushered in wherein an investor borrows money to buy stocks and uses the investment as collateral. Margin trading is generally used by investors to leverage investments and increase their purchasing power by owning more stocks without fully paying for it.
SEBI has finalized the 31 scrips for stock-based options (both call and put) trading. The contracts will be sold for a premium and will be American in nature which means that unlike index options (which are European) they can be exercised on any day. However, contracts will be settled only in cash for first six months and then by delivery.
The list includes ACC, Bajaj Auto, BPCL, BHEL, BSES, Cipla, Digital, Dr. Reddy’s, Grasim Gujarat Ambuja, HLL, Hindalco, HDFC, ICICI, Infosys, ITC, L&T, M&M, MTNL, Ranbaxy, RPL, RIL, Satyam, SBI, Sterlite Optical, Telco, Tata Power, Tisco, Tata Tea and VSNL.
The inclusions which surprise are Tata Power, Tata Tea, Sterlite Optical, M&M and HDFC. BSE 30 components not included are Castrol, Colgate, Glaxo, Nestle, NIIT and Zee. Volatile stocks such as Global, DSQ, Himachal are excluded. SEBI has tried to restrict volatility.
Contracts will have minimum size of Rs. 2 lakh initially (and lowered later) with maximum maturity of 12 months and will have minimum three exercise prices. Initial margins will be decided on a worst case loss covering 99 percent value at risk (VAR) in one day. This worst case loss will be calculated by valuing the portfolio under different scenarios of changes in prices and volatility. The price range for generating the scenarios will be 3.5 standard deviations.
For option sellers, the minimum margin will be equal to 7.5 percent of the notional net option value based on the closing price of the stock on last day else sum of the worst scenario loss whichever is higher. Buyer is not required to pay margin and will pay only the premium in advance.
Apart from existing member-wise position limits, the market-wide limit of open positions will be 20 times of daily average volume in last month in cash market or 10 percent of free float, whichever is lower. Exchanges will double the price and volatility range when the total open interest in a contract touches 80 percent of marketwide limit in that contract.
Post July 2, retail small time investors will cool their heels, preferring to watch from the fences while FIIs will rule the roost. The broker, as a matter of fact, will be at an advantage. Unlike earlier instances where he catered to trading only in equities, in the new environment he has the option of providing multiple products and the opportunity of hedging too.
All said and done, players are hopeful of a spurt in trading volumes once the new products and systems are fully understood and adapted well within a couple of months.
