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The number of active investors, who trade at least once a year, on NSE’s cash market segment has fallen 9% to 22.7 million in the fiscal year through November (FY24) from 24.9 million in FY23. This trend is being witnessed for the second straight fiscal year, according to data from NSE, which enjoys a 93% market share in the cash market, with smaller rival BSE accounting for the rest.
The fall in participation this fiscal year comes despite the Nifty generating a 15.7% return during April-November 2023—to 20,135 from 17,398—against a negative 1.75% return in the same period a year earlier, to 17,360 from 17,670. The active retail count hit a record high of 27.4 million investors in FY22, at the peak of the pandemic, which confined people to working from home. That fiscal year, the Nifty yielded a 17.5% return, rising to 17,465 from 14,867. But, since then, the retail investor count has been on a downward slide.
In contrast, the retail count in derivatives continues to rise. The number of active retail investors trading index futures and options, like Nifty and Bank Nifty, increased 7.5% to 7.2 million during April-November 2023, from 6.7 million in FY23. The figure stood at 5.1 million in FY22. The NSE figures for derivatives are a proxy for the whole market as it enjoys 99% market share, with BSE accounting for the rest.
In terms of net inflows, too, there is a sharp decline in the cash segment. Retail net inflows into stocks stood at just ₹8,700 crore in April-November, shows NSE data, against ₹49,200 crore a year earlier and a record ₹1.64 trillion in FY22.
Against this, retail investors had net purchased ₹51,100 crore worth of derivatives in April-November. In FY23, that figure stood at ₹60,000 crore and in FY22, at ₹48,000 crore.
In terms of turnover, too, the derivatives segment outshines the cash segment. For instance, in the current fiscal year through 22 December (FY24), average daily cash segment turnover jumped 34.3% to ₹71,795 crore from ₹53,434 crore in FY23.
During the same period, the average daily derivatives turnover vaulted 94% to ₹299 trillion from ₹154 trillion in FY23.
“Retail rich in cash from the bull run in the markets is deploying the cash in derivatives as they can get more leverage with the same capital,” said independent market analyst Ambareesh Baliga. “This is resulting in a jump in participation, despite the fact that leverage can be risky. Greed trumps reason.”
Baliga explains that if an investor invests ₹1 lakh in stocks and they run up by say 40%, he makes ₹40,000 on ₹1 lakh capital. But, if he deploys the same ₹1 lakh on an F&O trade, he can take exposure up to ₹5 lakh. A 40% gain on ₹5 lakh translates into ₹2 lakh, or twice the return on ₹1 lakh. However, an investor risks his capital being wiped out if the market turns against him, unlike in shares which he can continue to hold during a downturn.
Chandan Taparia, derivatives and technical research head at Motilal Oswal Financial Services, expects the lure for derivatives to persist with “option expiry happening each day of week, new clients entering by the day and people understanding the product better and using algorithms to trade.”
Taparia admits the lure of trading cheap index options on the Nifty and Bank Nifty is drawing more retail investors in.
“Even if you lose one day on Nifty, you think you can shift to Bank Nifty and make up that loss,” explains Taparia.
Indeed, NSE and BSE have launched weekly options that give a participant choice to trade daily.
For instance, Nifty Midcap options expire on Monday. Nifty Financial Services options expire on Tuesday, Bank Nifty options on Wednesday, Nifty on Thursday and Sensex on Friday.
NSE has maintained the global leadership position in equity index options with 97% market share in terms of contracts traded, with a slight drop of 2% month-on-month (m-o-m) to 8.2 billion contracts traded in October 2023 compared with 8.4 billion in the previous month, according to exchange data.
CBOE Global Markets retained its second spot with a 26% m-o-m increase to 100 million contracts traded in October 2023. This was followed by Korea Exchange with 83 million (+29% m-o-m), CME Group with 43 million (+31% m-o-m) and Deutsche Boerse with 40 million (+30% m-o-m) contracts traded respectively in October.
While new retail investors are also accessing the capital markets through the mutual fund route, MFs use the derivatives segment for hedging their underlying stock positions rather than as a punting tool, explained Baliga.
The current trend suggests that retail along with HNI investors have initiated huge short positions on index futures (Nifty and Bank Nifty). The counterparties to their trades are FPIs and DIIs. Their positions could be a combination of hedges or mere punts, according to Rohit Srivastava, founder of analytics firm IndiaCharts.
Since derivatives are zero-sum game, there is a buyer for every seller and vice versa. Unlike in the cash market, one man’s loss is another man’s gain.
As of 26 December, clients—retail and HNI—and proprietary (pro) traders were net short index futures by 100,791 contracts, which were purchased by FPIs and DIIs.
In the case of index options clients and pro are net short while DIIs and FPIs are net long. The exact quantity that is sold by one or more participants is purchased by the others (see chart).
Those buying in cash and futures, such as FPIs, tend to be super bullish while client category which buys in cash and sells futures could be doing so to hedge their portfolio against likely volatility with market valuations having swollen.
Barring index futures, average daily turnover for FY24TD (April-November 30) registered a record across all instruments in equity derivatives segment, with stock futures at ₹883 billion , index option at ₹515 billion (premium turnover) and stock options at ₹44 billion (premium). ADT in index futures, on the other hand, stood at ₹265 billion which is lower than ₹382 billion recorded in the last fiscal year.
In the last seven years, average daily equity futures turnover has grown at an annualized rate (CAGR) of 9.1%, while equity options premium turnover has grown by a significant 63.4% during the same period.
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Published: 27 Dec 2023, 09:47 PM IST
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