BSE cuts transaction charges for its equity derivatives segment  

December 21, 2009

 Asia’s oldest stock exchange, the Bombay Stock Exchange (BSE), is introducing revised transaction charges in the equity derivatives segment in a bid to attract more liquidity into its platform. This move, which will reduce the overall impact costs of investors, will be effective from 29 December 2009. With this, the BSE hopes to grab market share from the National Stock Exchange (NSE), which virtually dominates the domestic futures and options (F&O) segment.

According to BSE, the innovative fee structures will substantially lower transaction costs for all market participants and improve depth and liquidity in BSE’s equity derivatives segment.

The charges applicable will be Rs1 per Rs1 lakh for passive orders and Rs1.50 per Rs1 lakh for active orders inclusive of investor protection fund (IPF) and trade guarantee fund (TGF) for stock futures and index futures category. This essentially means that BSE will pay Re1 on every Rs1 lakh of passive orders placed by its members in the stock and index futures segment. Similarly, it will pay Rs15 on every Rs15 lakh passive order placed in the stock and index options segment.

Passive orders are orders that already exist in the order book at the time of matching (order taking place) while active orders are orders that are matched against the orders already existing in the order book at the time of matching.

How do brokerages and other market participants view this move by the BSE? “Most of the brokerages and market participants have welcomed this move, but the impact will take its own time. BSE’s recent move will give another opportunity for market participants to improve their volume and liquidity. Compared to the rival NSE’s volume, BSE’s derivatives volume is negligible, but the recent steps taken by it have created a positive environment in the minds of brokerages and market participants,” said Chandrashekhar Layane, senior vice president, FairWealth Securities Pvt Ltd.

Although BSE is betting on volumes to increase as a result of this pricing strategy, the end result has more to do with attracting market participants to the derivatives platform. “The claim as made by BSE may reduce some transaction costs, but it is subject to increase in trading volume. The volumes will increase only if BSE is able to attract market participants to its derivatives platform. Recently, BSE announced changes in monthly derivatives and weekly derivatives expiry dates effective from February 2010. Day-wise it is pre-poned to 3rd Thursday of the month instead of the 4th and Thursday for weekly contracts instead of Friday. This will help in easing the cost of carry due to duration of expiry day/dates and will also improve liquidity,” added Mr Layane.

The BSE index and single stock futures and options markets will now provide a whole new range of hedging, investment and trading opportunities to exchange members and their retail and institutional clients.

BSE launched the first exchange-traded Index Derivative Contract on 9 June 2000. Ever since, it has struggled to attract participants, affecting the liquidity on its derivatives platform. NSE, on the other hand, has made giant strides in the derivatives market, emerging as a virtual monopoly in this lucrative business, with a whopping 98% share.

Interestingly, however, BSE enjoys a lot more goodwill from many of its broker participants. Several of them also have a stake in the stock exchange. As such, they have a vested interest in providing support to BSE’s efforts to revive its struggling derivatives segment. Hence, it would not be surprising to see brokerage houses put their weight behind BSE’s latest move.
— Ravi Samalad with Sanket Dhanorkar