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Individual stock futures: small investor has few options

Sangita Shah

The introduction of individual stock futures and options to replace the carry forward system will drive out the small retail investors from the stock markets, market sources said.

According to market participants, while derivatives as instruments have always been an alien system to the Indian market, the technicalities involved will leave domestic investors bewildered.

The introduction of index futures in June 2000 can be termed as anything but successful. This can be proved by the fact that the average daily volume of Sensex futures has not crossed Rs 100 million.

Even Nifty futures, which has performed better in terms of liquidity, has barely registered an average daily volume of Rs 120 million. This is a fraction of the cash market turnover of Rs 50 billion collectively, in a stable market.

"Lack of understanding as to how the derivatives in stock markets are to be operated is the major roadblock, in the success of the futures and options market in our country," Bhavin Shah, a derivatives trader at a domestic firm said.

In fact, even the LC Gupta Committee has noted in its report in March 1998 that "derivatives are not always clearly understood. A few well-publicised debacles involving derivatives trading in other countries has also created widespread apprehensions in the Indian public's mind."

While economic literature recognises the efficiency enhancing effect of derivatives on the economy in general and the financial markets in particular, the committee felt the need for educating public opinion, as also the need to ensure effective regulatory checks.

"It is worth mentioning that while regulatory checks have been implemented, it has failed to educate public opinion. Under the circumstances, it is probably high-handedness on the part of the authorities to thrust upon them an alien system without giving an opportunity for smooth transition," a fund manager said on conditions of anonymity.

However, the fact should also be considered that if futures and options in individual stocks are introduced in the country, India will be among the handful of global exchanges which have these systems.

The problem is compounded by the fact that there are few international precedents for India to draw on in the matter of options and futures in individual stocks.

The extensive global trading in index futures and options have failed to have similar success domestically. Moreover, index options are yet to even see the light of the day.

While both the exchanges have undertaken countrywide education programmes, retail investors have only participated as spectators.

"Even the dealers in derivatives are not sure of the nitty gritty of trading in it despite having certificates from the respective exchanges," a dealer said.

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