• PAGE ONE
• INDEX
• HOME

Volumes soar as single stock `futures' mimic `badla'

Our Bureau

MUMBAI, Nov. 29

BARELY a month into single stock futures, the volumes have shot up through the roof. Dealers say that it is just the beginning of a new deferral product; once investors understand its usage, the volumes in futures could be in multiples of the volumes in the spot (cash) market.

From just Rs 41.59 crore on the first day, November 9, when stock futures were introduced, the daily volume zoomed to over Rs 308 crore on November 27.

Mr Jignesh Shah, strategist, ASK-Raymond James Investment Management said that the modern systems popularity may be attributed to its capacity to mimic traditional carry-forward system which is called synthetic badla.

In the coming months, the volumes in futures may overtake that in the cash (spot) market, Mr Shah said.

Through careful timing of the execution of two deals, one in the spot and other in the futures market, one can easily lock up the funds for a given maturity period to earn pre-determined returns.

On the last Thursday of the month, square up the two positions by selling spot and buying futures. Accuracy of the timing of the trades, margins, brokerage and depository charges are the costs one has to bear before calculating the returns from such arbi trage positions, dealers said.

Participation by institutions in the futures is likely to make it virtual money market in equities and the returns from using futures as a badla product may be in line (slight premium over call rate) with those obtained in the money market in the banking system, dealers said.

Further, futures are superior to badla as a fixed income instrument as the cost of carry in futures is known, both to the buyer and seller, at the time of entering into contract, Mr Sandip Tandon, head of equities, Refco-Sify Securities India said.

In badla, the returns were decided on weekly basis and were prone to some adjustments. When futures become delivery-settled, it will serve as a pure badla product with maximum transparency, Mr Tandon said.

For example, you may buy Reliance Industries stock in the spot market at a price of Rs 260 and simultaneously sell one-month futures of the same scrip of the same quantity at a strike price of Rs 262. In another scenario, when the futures are quoted at a discount to spot market, institutions and others holding large inventory can claim backwardation charges by selling spot from their existing stock and buying futures.

In other words, this may work as a sort of stock-lending, dealers said.

Initially, when the stock futures are cash-settled, what the badla financiers should take care is that the stock in which he takes position should have enough liquidity in the cash market when he goes to square-up the positions, both in spot and futures market.

Those fears seem to be unfounded as the stock exchanges have introduced futures in select 31 liquid large capitalised stocks only.

In the second phase, when stock futures are delivery- settled, the fear of adequate liquidity just does not arise since the futures buyer has to lift the delivery from the seller, derivatives dealers said.

Currently, in cash-settled system, the futures contracts are settled by square-up and payment of cash instead of delivery of shares. In the delivery-settled system, the futures contracts are settled by actual delivery of underlying shares by the sellers.