BSE’s Equity derivatives segment continues its upward trajectory

By Shri Sameer Patil – Chief Business Officer, BSE

Mumbai, 31 Aug 2020: BSE launched Weekly contracts on S&P Sensex 50 index with Monday Expiry from June 29, 2020, a different product to Sensex 30 and deviation from industry accepted norm of Thursday expiry. LES was introduced on these contracts from July 1, 2020. This was done following extensive feedback from market participants and research, wherein the need for a unique product was direly needed. This leap of faith by BSE has been met with wide acceptance, with the product gaining popularity, as seen by new records daily. The average daily turnover has increased from INR 26,196 crores in July to INR 85,172 crores in August, growth of more than 3 times. Recently, the turnover has consistently crossed INR 1 lakh crore, with the segment registering a high of INR 1,14,263 crores. Even with LES, the renewed interest in the equity derivatives segment of BSE is due to varied reasons explained below.

Familiar Product with Alternate Expiry Day

The S&P BSE 50 index derivatives on BSE has values in the range of 12,000 that is comparable to other large trading index, familiar with market participants. The companies represented in the Index are large companies representing about 58 percent of market capitalization of India’s listed universe, which offers greater familiarly for participants to hedge their equity risks. This permits adoption of similar trading and algo strategies. The Weekly Expiry of options contracts on Monday instead of earlier Thursday provides offset with other similar products in the market.

Interoperability and cross-margining framework

the Interoperability of clearing corporations of stock Exchanges ensures seamless clearing operations and reduces costs by improving operational efficiencies. An investor could trade on the BSE platform and get the trade cleared at a different venue where your collateral is kept. Due to the inter-operability of exchanges including in equity derivatives, brokers can get margin set off and one single settlement across all exchanges including BSE. Their positions are also squared off against each other.

SEBI has also allowed index margin offset for different indexes having high correlation. These measures enforced by SEBI have enhanced the potential for a newcomer in this market. It also allows brokers to come out of their position in liquid market when they have a position outstanding in a low liquid market. Effectively on the back end, positions have become one and margins have reduced, encouraging brokers and traders to trade on lower cost venues.

Enhanced Liquidity

BSE’s liquidity enhancement scheme is focused on providing liquidity through continuous and fair two-way quotes, which in turn has enabled greater trading volumes. Close to 75 percent amount of LES incentives being paid, as given as per BSE website, are kept for market makers to provide continuous, fair and transparent two-way quotes. In essence, comparable on-screen liquidity with continuous two-way quotes in almost all index options contracts vis a vis competing exchanges are available on BSE.

Cost of Trading

Trading at BSE’s equity derivatives segment is currently free of charge, along with best-in-class trading infrastructure, co-location services, lease-line and front-end software. BSE is also constantly improving the trading landscape with enhance price discovery, liquidity and transparency in Indian markets via these equity derivatives contracts. BSE also offers the most cost-efficient trading platform for Index options, as participants can hedge daily equity exposure of 10 crores with no transaction charges i.e. savings to the tune of INR 1.2 lakh as compared to other trading venues. This provides further opportunities for investors and businesses to not only protect their positions against price fluctuations but also save on transactions.”

Cost and Reliability of transactions

BSE offers the fastest speed of technology as compared to anywhere in the world, trading engine offers less than 6 microseconds response time. Market feedback has indicated that BSE offer better reliability of technology during Covid times as compared to other exchanges in India, many of whom have faced technical difficulties of various types creating severe risks for all participants. Members are also benefiting from BSE services such as superior front-end trading software and co-locations services available free of cost. Moreover, BSE systems are more robust and advanced, simple to use yet offering best-in-class risk management framework.

BSE and its subsidiaries provide several solutions to all its members including BOLTPlus On Web™️ (BOW) and BSE Electronic Smart Trader (BEST), Cloud Based Hosted Solution services related to front office order routing software to its members in addition to front end desk top solution like BOLT and BOLT+. These services are free of cost currently for all members and offers no restrictions in terms of lease line constraints. The BSE software systems are also robust and demonstrated no outages or technical glitches over the last few years.

These services are even more important because many third party CTCL and IML service providers don’t provide software for new segments of exchanges in time and at a reasonable cost. BSE’s services therefore ensure that all members, especially small-sized members, can remain connected and trade seamlessly without any technological interruptions at no cost.

BOW is a powerful Hosted real time trading solution, available as a Cloud Based hosted solution. This software allows the user to watch real-time market prices and execute orders on multiple exchanges (BSE, NSE, MCX and NCDEX) instantaneously with real time price streaming, risk management from a single window. Similarly, BEST is a robust, state-of-the-art Cloud Based hosted trading solution for BSE members and Customers. The Trading software has been developed to provide an integrated system for Trading and Risk management. BEST supports trading on multiple exchanges (BSE, NSE, MCX). Both these applications can be connected through Internet from Exe, Browser and Mobile application for trading on Multiple Exchange segments from a single screen, login ID and password.

BSE’s goodwill and other ancillary Services

Despite the pandemic and the lockdown, BSE always focused on offering superior services. One of the key services where BSE took the lead was the coordination with all state governments and other authorities to provide easy work environment for its members and their employees, including providing of e-pass. The exchange also focussed on regular webinars for market participants, in all segments including Equities, Equity derivatives, commodities, SME, Mutual Funds. Efforts were also taken to highlight importance of cyber security.

Added benefits by trading on BSE include trading with one standard deposit at BSE for all trading segments as well as mutual fund distribution. A trader on BSE platform can also take advantage of multi-legged order entry facility in its equity derivatives segment which allow to place a combination of orders across different F&O contracts. The move will help the trader incorporate more advanced derivatives trading strategies. BSE also offers free co-location for members who can benefit from low latency feeds. Trading members registered can avail this facility to use it to connect and ultimately trade on a single platform, at a scale and speed not previously achieved.

Way forward

Current restrictions on Order to Trade Ratio is a deterrent to create initial and to sustain liquidity. Similarly, some front-end vendors are not yet providing fair and equal accessibility to BSE derivatives segment, and offer the feature of Interoperability on their software. Post Interoperability, there is concept of segment based at clearing corporation level, so there should not be additional charges for back office enablement of BSE derivatives. However, most vendors still charge on exchange basis. While trading participation is getting wider, we believe that adoption of best practices in these mentioned factors may further increase participation and liquidity on the BSE equity derivatives platform.