Business Today Net Special

Future In Futures Trading

Giving in to a long-standing market demand, the finance ministry is likely to allow futures trading in 31 individual stocks by the end of October this year. Marketmen are hoping that this facility, which allows deferred payment, will send the market volumes back to the pre-badla levels. BT spoke to investors and market operators to find out how much of the current gloom will lift because of the futures trading.

By Roshni Jayakar

Bombay Stock Exchange

The UK was the ninth country to introduce stock futures on January 29, 2001. The US would be the 10th as the proposal for launch has been cleared. The Indian stock markets are likely to be 11th. The Securities and Exchange Board of India's (SEBI) in-principle nod to introduce individual stocks futures initially in 31 stocks could stir things up in the markets. The same stocks in which individual stock options have been permitted.

In the immediate term futures will inject liquidity that has crashed. An institutional investors that wishes to buy or sell a particular stock can transact first in the futures market. Subsequently, he can reverse the position in the cash market. Since mutual fund managers are beset by problems relating to their inability to move in and out of a scrip when they need to, in the absence of liquidity problems in the underlying cash market, introduction of futures will provide them. Short selling of stock will become a simple reality again. This will allow investors to use it as a hedging tool.

The difference between the stock prices in cash and futures market will present investors with arbitrate opportunities. The cash and futures market are separated in the stock futures mechanism whereas thereby helping in faster and more efficient price discovery.

The L C Gupta committee report of 1998 which laid down the framework for derivatives trading in India did not consider stock futures because they were traded on only a couple of exchanges. For those unaccustomed to stock market lingo, individual stock futures price is the price of the. underlying security with interest (net of dividend) added to it. Or it's the price at which one can buy (or sell) a stock at a future date and that price must compensate for the cost in terms of the interest forgone on the purchase of the stock and recognize the gain from dividends received until the delivery date.

Even as the SEBI is working on the rules for stock futures, here are a few tips for making it a success. The minimum value of a contract for derivatives in India is Rs 2 lakhs. This is fairly high and given the expectation of retail participation this amount needs to be revised to say around Rs 50,000. Moreover, institutional investors who till recently were not allowed to trade in options should be participate for hedging and portfolio re-balancing. Tax issues too need to be sorted out to ensure that they are treated as capital gains if they are not used for speculation or arbitrage.

The introduction of rolling settlements, and options in 31 stocks following the ban on carry forward trading or badla has led to crashing of volumes and lowering of depth in the Indian markets. Only precipitating the problem on the bourses where liquidity is concentrated in a handful of stocks. Retail participation is a must for healthy volumes and the answer could be futures contracts on individual stocks.

Low risk, less volatility, and higher liquidity - futures could just be what the doctor ordered for a market.

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