Indians Prefer Spot Trading than Futures Trading

After 7th year of introduction of equities futures and options, the maximum traded volume has seen only in the near month contracts. Far month contracts are either illiquid or less active. The National Stock Exchange has started long term options, which has wide popularity in other world markets, has attracted very few investors in India. Even the middle month contract usually get investors attention only after the mid of the contract month. This anomaly is partly due to low participation of FIIs and DIIs due to legal constraints. Here one has to think about the usefulness of derivatives, which is used to find the future price of an underlying asset.

In the commodities market too, we have this problem, the near month contracts are having higher volumes than far month contracts. If the buyer and sellers are very strong (powerful), then this trading pattern will have severe negative impact on the price.

The international commodity market (we are discussing on TOCOM Rubber) will guide us a lot to solve this anomaly. There (in TOCOM) a broker who is holding October futures of rubber 100 tones, is allotted to hold only 20 tons in June, 40 tons in July, 60 tones in Aug, 80 tons in September and so on. By doing so future contract of the far month will have higher volumes and higher open interest. In this situation brokers will always advise investors to create big positions in the far month contracts. Near month contracts will have less volume and open interest, but all contracts become liquid.

SEBI and FMC should take necessary steps to implement a trading system in equities and commodities market then only investors can trade more wisely than the present state. To solve this issue, SEBI and FMC can follow the following method. For example now in equities market we have May, June and July futures made available. If a broker holds Rs. 9000 crores worth position in July, then the broker can hold Rs. 3000 crores worth contracts in May and Rs. 6000 crores worth position in June. By doing so, arbitragers will look after the price discrepancies.

The article illustrates only the necessity of having higher volumes in equities and commodities derivative market, rather than activities confined to only the near month. By implementing this, volumes will also grow substantially due to arbitragers, which will bring more transparency to the market. If no regulatory reform would not taken place in near future it is better stop this futures market for equities and commodities.

Research Team,
Derivative Research Forum (www.derivativeforum.com)
Centre for Resource Development and Research,
Aluva 683 108. Kerala. India