BSE now corners a fifth of derivatives market share

BSE (formerly Bombay Stock Exchange) has seen its market share go past the critical 20 per cent mark in the derivatives segment, intensifying its battle with bigger rival — the National Stock Exchange (NSE) — which, less than a year ago, had a monopoly in this space.

In April, the average daily trading volume (ADTV) for BSE stood at Rs 89 trillion, accounting for 20.6 per cent of the overall ADTV of Rs 432 trillion (based on notional volumes for options).

Last month, the ADTV for NSE saw a month-on-month decline for the second straight month to Rs 343 trillion, indicating that the derivatives pie has stopped growing and some volume generators could be moving to BSE.

Industry players said BSE’s derivatives platform has been gaining wider acceptance among market participants.

The bourse now has 3.5 million unique investors, close to 400 brokers, and 100 foreign portfolio investors (FPIs) trading on its platform, along with several algorithmic (algo) traders who are seen as active volume generators.

When BSE relaunched its Sensex and Bankex derivatives contracts in May 2023, it had the support of fewer than 10 brokers.

Market watchers say BSE, under the leadership of its new managing director and chief executive officer Sundararaman Ramamurthy, has played its cards well.

To begin with, the bourse kept the transaction charges and the ticket size for Sensex and Bankex low.

It also engaged with brokers, software developers, and algo traders to help boost its volumes.

The strategy to have different expiry dates for different products also proved to be a hit, as most volumes are generated on the day the contracts expire.

The bourse still has many tricks up its sleeve, and analysts see its market share crossing the 30 per cent mark this financial year (2024-25/FY25).

To make further inroads into the single stock derivatives, BSE has announced a change in the expiry date of monthly contracts to the second Thursday of the month from the last Thursday of the month — used by NSE.

The move is seen as a product differentiation strategy that has worked in the case of Sensex and Bankex.

The bourse is also targeting to increase the FPI count and is in talks with more discount brokers and algo traders to use its platform.

In a recent note, HDFC Securities said that led by growth in Bankex volumes, BSE’s derivative ADTV could reach Rs 114 trillion in 2025-26 (FY26), and market share could cross 30 per cent.

“We believe the derivative growth for BSE will continue to be led by the scaling of the Bankex contract, the go-live of large discount brokers, a higher volume of algo and proprietary traders, an increase in active clients, and greater participation of FPIs,” said Amit Chandra and Dhananjay Jain, analysts at HDFC Securities in a note a month ago.

However, BSE recently suffered a huge blow when the market regulator, the Securities and Exchange Board of India (Sebi), clarified that the bourse has to pay regulatory fees on the annual turnover based on the notional value of the options contract and not on premium turnover.

For 2023-24, BSE has said it will have to pay Rs 96.3 crore as the differential Sebi regulatory fee.

The higher fee outgo is expected to weigh on its profit growth estimates for FY25 and FY26 by about 18 per cent. To cushion the blow, BSE has raised the transaction charges on Bankex and Sensex options by upwards of 30 per cent.

Investec, in a note, has said NSE’s transaction charges are currently 40 per cent higher than those of BSE, and a 35 per cent increase in transaction charges will bring it in line with NSE and more or less allow it to ensure that profitability remains intact.

However, it remains to be seen how the higher transaction charges impact its volumes and alter the dynamics with NSE, which still offers a much larger liquidity pool.