The October 2008 landslide in stock prices, which caused a nearly 90 per cent drop in India's equity derivatives business, has dealt a severe blow to Asia's oldest bourse, the Bombay Stock Exchange.
In the past three months, 23 stock brokers have opted for voluntary closure of their derivatives business on the exchange and the daily turnover on the exchange is now as low as Rs 85 lakh (Rs 8.5 million), compared to Rs 1,500 crore (Rs 15 billion) to Rs 2,000 crore (Rs 20 billion), when the market peaked in January this year.
The BSE benchmark index Sensex was hovering between 12,500 and 15,000 before October. Since then, it has traded in a narrow range on wafer-thin volumes.
As a result, said a stock broker, brokers thought it logical to suspend their derivatives business on the BSE since there was no use paying the exchange margins. "It is part of our cost-cutting exercise.
Although there is no business in the futures segment on the National Stock Exchange, we still pay margins so that we are ready to take opportunities when there is activity. But incurring costs for this on the BSE is useless since hardly anyone trades in derivatives there," said a broker.
Every broker has to deposit margin money, depending on which they are given a trading limit by the stock exchange. Large brokerage houses mainly raise this money through debt placement at high interest rates.
Overall, nearly 30 brokers have suspended their derivatives business on the BSE this year. There were over 300 brokers in this segment, but not even 10 per cent are active.
On the NSE, more than 1,000 brokers trade in derivatives, but the daily turnover has declined significantly. At the start of this year, the turnover ranged from Rs, 80,000 crore (Rs 800 billion) to Rs 90,000 crore (Rs 900 billion), but it is now down to Rs 15,000 to Rs 20,000 crore (Rs 150-200 billion).
The NSE is mainly able to generate volumes because most large institutional investors prefer this exchange. On the BSE, on the other hand, a major chunk of the volumes has mainly come from block or bulk deals in the cash segment. These deals are also thin on the ground.
Market players, however, say it may be tough for the NSE to maintain its leadership in the equity space with new players emerging.
Financial Technologies, the promoter of the Multi Commodity Exchange, is setting up infrastructure for an equity exchange after it successfully launched a currency derivatives exchange, MCX SX, recently. MCX SX, which went live nearly a month after the NSE launched currency futures trading, is already neck-and-neck with the NSE in terms of turnover and volumes.