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Co-location attracts institutional investors, which drives volumes for long-dated options, with higher realisations at lower costs.
Exchanges earn 70 per cent of market infrastructure revenues. They are beneficiaries of speculative activity.
The listed BSE has around 29 per cent of the notional options turnover (Dec '24). Restriction on weekly expiry contracts per exchange from Nov '24 has impacted volumes.
But BSE saw improvement in premium average daily turnover or ADTO (9 per cent absolute growth in Dec'24), premium turnover market share (at 15 per cent in Dec'24), and the premium-to-notional turnover ratio (at 10 basis points in Dec '24 vs. average of 7.3 basis points in previous 3 months).
Decline in notional turnover lowers regulatory charges and clearing & settlement costs, boosting profitability.
The change in Sensex expiry day from Friday to Tuesday may boost market share.
The scale-up of co-location servers will bring in high-frequency traders and institutions. Star MF (web-based platform for distributing mutual funds) has delivered stellar performance.
The partial implementation of the new F&O regulation from Nov '24 led to reduction of weekly expiry contracts to one per exchange.
This led to a 15 per cent decline in F&O notional ADTO and a 12 per cent decline in F&O premium ADTO for BSE.
But BSE had only two weekly expiry products -- Sensex and Bankex, compared to NSE's four. Sensex derivatives are now the only weekly expiry contract, while Bankex and Sensex 50 contracts moved to monthly expiry.
BSE saw 9 per cent growth in premium ADTO in Dec '24, driven by an increase in trading of options on non-expiry days. Notional turnover may decline 10 per cent in FY26 and grow 16 percent in FY27.
As of Dec '24, BSE's options, notional and premium market share has improved to 29.4 per cent and 14.6 per cent respectively (13.8 per cent/4.8 per cent in Dec '23).
The shift of weekly expiry day of Sensex option contracts from Friday to Tuesday may boost market share due to the gap with the existing weekly expiry day of Nifty contracts (Thursday).
In the cash segment, BSE's market share was at 6 per cent in Dec '24 (8.5 percent in Dec '23).
Star MF, the mutual fund business of BSE, processed average 50.6 million transactions per month in 1HFY25 vs. 30 million in FY24.
BSE will be launching Star MF 2.0 with Rs 21 crore invested in the platform.
Co-location could be the next big revenue driver. Co-location attracts institutional investors, which drives volumes for long-dated options, with higher realisations at lower costs.
The premium-to-notional turnover ratio may improve to 12 basis points in FY26 and 13 basis points in FY27, boosting revenue.
BSE may register a revenue growth of 44 per cent and 74 per cent for operating profit over FY24-27. Better premium-to-notional turnover ratio will offset volume decline.
BSE used to see large volumes on expiry day. The premium-to-notional turnover ratio was at 8 basis points vs. 18 basis points for NSE (Nov '24). With volumes up on non-expiry days, this ratio has increased to 10 basis points in Dec '24.
The minimum lot size for Sensex contracts is up from 10 to 20, for Bankex contracts from 15 to 30 and for Sensex 50 contracts from 30 to 60.
Margin for BSE's contracts remain lower than for NSE. The BSE subsidiary Indian Clearing Corporation Ltd (ICCL) earns treasury income on clearing and settlement funds.
BSE earned Rs 180 crore (13 per cent of its revenue) in FY24 and 8 per cent of its revenue as of Q2FY25 for FY25. After the implementation of new regulations, earnings from ICCL will be hit.
So the BSE revenue mix is skewed towards transaction charges. However, increasing cash market activity, continued momentum in Star MF platform and scale-up of colocation can help diversify the mix. Listing fees, treasury income, data services and index business lends stability.
Operating profit may clock a growth of 74 per cent during FY24-27, with margins rising to 61 per cent in FY27 (34 per cent in FY24).
Net profit (excluding exceptional gain) is also expected to see a growth of 74 per cent over FY24-27.
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Feature Presentation: Rajesh Alva/Rediff.com
