Retail derivatives inflows in NSE at 100x that of cash

The reasons: Prevailing bullish sentiment in broader markets, heightened volatility ahead of elections, entry of a new breed of participants and the availability of more index options for trading almost daily.

Against ₹500 crore invested in NSE’s secondary market, direct retail pumped ₹50,500 crore into equity futures and equity options during April-September, NSE data shows. The inflows could exceed last fiscal year’s ₹60,000 crore, with six months left in FY24.

The trend is expected to have sustained in October and may continue into Samvat 2080 as well, with markets holding up well, despite the war in West Asia and the persistence of high interest rates in the US for longer, as underscored by the Federal Reserve chairman Jerome Powell on Thursday, and the assembly elections this year and the national election in 2024.

“Whenever you’re in a raging bull market, especially in small and midcaps, the interest in derivatives tends to be way higher than in the cash market and tapers only if the rally falters," said Rajesh Baheti, managing director, Crosseas Capital, one of the country’s largest stock market arbitrageurs and jobbers.

Baheti expects the rally to sustain, given robust flows of around $2 billion a month from systematic investment plans (SIPs) and healthy quarterly earnings. According to Motilal Oswal, of the 185 companies which have declared results in its coverage universe, earnings were up 58% against expectations of 53%.

The retail frenzy has shown up in the growth of the notional derivatives turnover in the fiscal year: At ₹ 43,592 trillion in the fiscal year through 10 November, it has exceeded the whole of the last fiscal’s turnover of ₹38,223 trillion by 14%. Index options – Nifty, Bank Nifty and Finnifty—alone accounted for 98.5% of the ₹43,592 trillion turnover.

“Trading increases whenever there is a bull market, but (another reason is) the entry of newer, better-informed participants under and around age 30, who have less capital to deploy and are dabbling in relatively cheaper index options," said Jayprakash Gupta, founder of Dhan, a technology platform for trading and investing.

“Other reasons include the removal of intraday leverage by brokers, which until 2019 was available on options, too."

Intraday leverage meant that brokers would part-fund the margin or premium requirement by clients, multiplying their losses. Now, with Sebi having banned margin funding by brokers, the risk of such a multiplication of losses by clients has dramatically reduced, explained Gupta.

Apart from that, there are more options available for trading daily, like Nifty Midcap on Monday, Finnifty on Tuesday, Bank Nifty on Wednesday and Nifty on Thursday, said Rajesh Palviya, derivatives head of Axis Securities.

Gaurang Shah, senior vice president of Geojit Financial Services, said heightened volatility owing to elections would result in greater interest in products like options, given their relatively cheaper cost for buyers.