Will BSE's Tweaks Affect Nifty?

'It is like a chicken-and-egg situation.'
'All these product tweaks are innovative, but traders won't move unless there is liquidity.'
'And liquidity cannot be generated until traders move.'

BSE (formerly the Bombay Stock Exchange), Asia's oldest bourse, is initiating several tweaks to its products to arrest the fall in market share -- both in the equity cash and derivatives segments -- said people in the know.

Under the leadership of Sundararaman Ramamurthy, the exchange has lined up several changes in the cash market, equity derivatives, as well as currency derivatives.

Ramamurthy -- an early architect of the rival National Stock Exchange -- took charge as BSE managing director and chief executive officer in January.

For the cash segment, BSE has reduced the tick size to just 1 paisa for stocks below Rs 100. The move has already started to yield results, with the turnover for stocks in this segment growing 14 per cent in March.

In February, the BSE introduced the 10 paise strike intervals for the currency options segment. The move helps lower premiums, leading to lower costs of trading.

Strikes with an interval of 10 paise strike interval have contributed to 64 per cent of the US dollar/rupee turnover in March.

The most significant change, however, will be the relaunch of the Sensex and the Bankex derivatives contracts.

The lot sizes of the Sensex will be reduced from 15 to 10; for Bankex Index derivatives, from 20 to 15. The change is aimed at lowering the lot size and thereby the margin to attract traders.

Now, the Sensex contract size will be Rs 6 lakh, compared to the Nifty's Rs 9 lakh.

The exchange will also reach out to brokers and traders, highlighting the benefits of the product tweaks and low costs. It will also underscore the high correlation between the Sensex and the Nifty -- the most popular index derivatives.

Another unique proposition offered by the bourse will be to move the day of expiry to Friday (from Thursday) to appeal to traders with specific hedging and trading needs.

"The exchange has been in dialogue with several top brokers like Zerodha, Upstox, ICICI Securities, and Axis Securities. On many platforms, the BSE was not getting access and prices were not being shown to traders. The BSE is engaging with them to facilitate the same," said a person in the know.

The transaction charges in equity futures at BSE are zero, while it claims 90 per cent lower transaction charges in equity options.

Notwithstanding lower costs, the BSE has failed to develop any cracks in NSE's dominant position.

Industry players say traders are willing to incur higher costs of trading for a venue that offers deeper liquidity, helping lower impact costs.

"The impact costs for the BSE are on the higher side. It is like a chicken-and-egg situation. All these product tweaks are innovative, but traders won't move unless there is liquidity. And liquidity cannot be generated until traders move," said a broker.

In the cash segment, the bourse had a market share of nearly 7 per cent in March, up from 6.6 per cent a month earlier.

Meanwhile, in the derivatives segment, its market share has dropped to near-zero, from 2.5 per cent at the end of last financial year.