Although the Indian exchange-traded derivatives market has been evolving for the past decade, with new exchanges launching and more products being traded, a lack of competitive choice remains, according to new research from financial consultancy Celent.
“Equity derivatives were launched in 2000; commodity derivatives were launched in 2003; and currency derivatives launched in 2008. In each of these instances, the market has grown into one of the largest, by volume, in the world,” wrote Anshuman Jaswal, senior analyst at Celent’s Securities & Investments Group and author of the report. “However, having good levels of trading does not mean that there are sufficient competitive choices between different exchanges in India. The lack of interoperability is one hurdle.”
The report, entitled ‘Indian derivatives markets: Illusions of competition?’, also found liquidity in the equity index derivatives meant that there was a greater preference for these products over individual equity derivatives.
“The Indian exchange-based derivatives market has made excellent progress in the last decade, but there is certainly room for improvement,” said Jaswal. “From a competitive point of view, the currency derivatives market seems to be the best positioned, followed by the commodity derivatives market. For equity derivatives, the Bombay Stock Exchange (BSE) has been able to provide an alternative only for a brief period. The entry of MCX Stock Exchange (MCX-SX) should provide some much needed boost to competition in this market in the near future.”
In July, India’s newest stock exchange, MCX-SX, gained regulatory approval to deal in equities, equity futures, equity options, interest rate futures and wholesale debt.
The National Stock Exchange (NSE) has been the main equity derivatives exchange since 2000 and Jaswal believes the BSE had been unable to compete effectively with its more modern competitor in the last decade.
“However, in February 2012, the BSE started providing incentives for trading on its derivatives platform. That meant the turnover for its main product, index options, reached around 40% of the levels for index options for NSE,” he said. “But the ending of the incentive scheme has resulted in a fall in this turnover, and the BSE might have to continue to provide further incentives if it has to attract investors.”
To Jaswal, such a situation brought into question the long-term viability of such a scheme, but he nonetheless believed the exchange had sufficient resources to maintain the scheme for the short to medium term at least.
“An exciting prospect in equity derivatives is introduction of MCX-SX for cash equity and equity derivatives. It is expected to focus on beginning derivatives trading in companies that are already listed on NSE and BSE soon and should go live in early 2013,” he said. “The strong performance of MCX in commodity derivatives and MCX-SX in currency derivatives means MCX-SX could be a tougher competitor for NSE in equity as well. It has a strong technological pedigree besides good reach in smaller cities and towns across the country, which could provide it a good opportunity to expand the retail investor footprint in the Indian market.”