Low premium turnover a challenge for BSE despiteb recent stock surge

The stock of BSE Ltd has risen sharply this month, fueled by hopes that it will benefit from new rules aimed at controlling options trading. However, the exchange’s low options premium turnover could dampen its success.

BSE’s stock increased by 17% in October, reaching ₹4,521.85 on Wednesday. In contrast, the Nifty Midcap 150 index, which includes BSE Ltd, fell by 1.3%. This increase in BSE’s stock price followed the announcement from the Securities and Exchange Board of India (Sebi) to limit retail options trading by allowing exchanges to launch only one weekly expiry contract starting November 20.

Market participants believe that these new restrictions will impact BSE less severely than its bigger competitor, NSE, which currently operates four weekly options contracts compared to BSE’s two. However, analysts warn that BSE’s low options premium turnover could hurt its revenue from transactions.

Understanding Premium Turnover

Premium turnover represents the market value of an option, while notional turnover refers to the total value of a derivatives contract. For example, if the premium for an 81,500 Sensex call option is ₹375 per share (10 shares per contract), the premium value is ₹3,750 (375 x 10), while the notional value is ₹8,18,750 (81,500 + 375 x 10).

This premium turnover is crucial for exchanges because the securities transaction tax charged to sellers is 0.1% of the premium. Exchanges also earn transaction fees based on the premium, not the notional turnover. These transaction fees are a primary source of income for exchanges.

BSE vs. NSE

Current data shows that BSE has a significantly higher notional-to-premium turnover ratio in index options at 1,442, compared to NSE’s 605. This indicates that BSE’s premium turnover is lagging behind NSE’s. Notably, NSE has an 88.5% market share in index options premium turnover so far this fiscal year.

Analysts attribute BSE’s lower premium turnover to NSE’s early success with liquid contracts on Nifty, which began in February 2019, compared to the relaunch of Sensex options in May 2023. Additionally, Nifty options contracts tend to be more liquid than those for Sensex.

Chandan Taparia, Senior Vice President of derivatives and technical research at Motilal Oswal Financial Services, noted that BSE’s monthly options need to gain traction to improve premium turnover.

Another anonymous broker mentioned that the higher liquidity of NSE’s monthly options, along with more participation from institutional investors, contributes to its higher premium turnover. He pointed out that BSE tends to see most premium turnover concentrated on expiry days, when premiums often shrink.

Regulatory Changes Impacting Trading

Although market analysts see the recent regulatory changes as leveling the playing field, they believe both exchanges will suffer from the new limits on the number of weekly contracts and the increase in lot values, which will rise to ₹15-20 lakh from ₹5-10 lakh starting November 20.

Currently, NSE offers four weekly index options contracts, including Nifty Midcap Select, Finnifty, Bank Nifty, and Nifty. BSE provides two options: Sensex and Bankex. Starting November 20, NSE will only operate Nifty weekly contracts, while BSE will focus solely on Sensex weekly contracts. This change may reduce trading volumes, even as it complies with regulatory guidelines.

Since the pandemic, retail and proprietary traders have increasingly engaged in trading weekly options contracts.

BSE’s Perspective

Sundararaman R., MD and CEO of BSE, discussed the need to emphasize monthly option contracts in light of Sebi’s proposed restrictions on equity derivatives trading. During a conference call in August, he remarked that regulatory changes could present new opportunities.

“While some may think the number of transactions will decrease, others believe that the premium traded will be very high,” he said. He added that regulatory and clearing charges could decline while revenues increase, as these are based on premium values.

BSE reported total revenue of ₹674.34 crore in the June quarter, a 149% increase year-on-year. However, net profit dropped 40% to ₹264.9 crore, largely due to a provision made for regulatory fees and an exceptional gain from a sale in the previous year.

In comparison, NSE reported total revenue of ₹4,950 crore, a 47% growth year-on-year, with profit after tax rising 52% to ₹2,567 crore.