Mumbai: Volumes on India’s thriving futures and options dropped nearly a fifth last week after Securities and Exchange Board of India’s (Sebi) ban on New-York-based quantitative trading firm Jane Street for alleged market manipulation. The recovery to the recent peak in trading activity may not happen immediately, which may squeeze exchanges’ earnings. The daily average turnover in index options trade on the NSE, which commands the majority in derivatives trading volumes in India, declined by nearly 17.4% last week from previous week.

“The recent dip in options turnover is likely due to the exit of a large market-making participant, which has impacted market liquidity and efficiency,” said Vaibhav Sanghavi, CEO, ASK Hedge Solutions.

Sebi’s interim, ex-parte order probed into alleged index manipulation by Jane Street involving bank shares and Bank Nifty index futures and options, while banning it from trading in Indian market. The regulator’s investigations showed the trading firm was engaged in manipulative trades on expiry days of Bank Nifty derivatives that pushed outcome in its favour. The absence of Jane Street in market has had a ripple effect with other large firms cutting the size of their trades.

EXCHANGE IMPACT
On the weekly options expiry day of Thursday-the most active trading day-turnover was down over 21% to about ₹472.5 lakh crore from ₹601.2 lakh crore a week ago, as per data from ETIG. Vipin Kumar, assistant vice-president of derivatives and technical research at Globe Capital Market, said during the entire expiry week (July 4 to July 10), index futures volumes were down by nearly 24% while index options volume was down by 16.5%, when compared with the entire previous expiry week (June 27 to July 3). Shares of BSE listed on the NSE, and NSE traded in unlisted market, declined in face of drop in volumes. Since Sebi put out order on July 3, NSE shares have dropped 6% to ₹2,150 as on July 13, as per data from unlistedzone.com. BSE stock is down 16%. “It’s too early to determine if this loss of turnover is permanent, but it will certainly impact revenues at the exchange-level if prolonged,” said Sanghavi.

Kumar said volumes may have also declined as a result of lower volatility due to choppy trading since the start of July. “The index was trading in a tight range of less than a percent and volumes are usually low during this kind of market move,” he said.

“On July 11, Nifty breached that range on the downside and we recorded a sharp uptick in the volumes of index futures, stocks futures and stocks options that were up by 17%, 18% and 28%, respectively compared with the same day the previous week.”

LEVEL PLAYING FIELD
Sanghavi said that while this may reduce turnover in the short term, it also creates a more level playing field, limiting the advantage of high-frequency or algorithmic traders who typically account for 40-45% of options volume. Rajesh Palviya, head of technical and derivatives research at Axis Securities, said liquidity could improve once mutual funds launch SIFs, which could build derivative books of Rs 30,000- Rs 40,000 crore over time