The second week of June saw a dramatic plunge in options trading activity on both the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE), reaching near four-month lows. This significant drop is attributed to a confluence of factors, primarily the escalating Middle East conflict and a regulatory investigation into high-frequency trading (HFT).
Market experts suggest that the uncertainty surrounding these events has prompted many traders to adopt a wait-and-see approach. The resulting decline in participation is clearly reflected in the numbers:
These figures represent the lowest weekly average premium turnover for both exchanges since February 24-28.
Rajesh Baheti, managing director of Crosseas Capital, points to a "risk-off" sentiment fueled by the heightened geopolitical uncertainty as a key driver of the reduced volumes. Jyoti Jaipuria, founder & managing director of Valentis Advisors, echoes this sentiment, highlighting the indecisiveness created by the rapidly shifting narrative surrounding the Middle East conflict.
The conflict's volatility is further underscored by the fluctuating India VIX, a key measure of market fear. After an initial dip, it surged following the conflict's escalation, reflecting the uncertainty impacting options traders.
Rajesh Palviya, derivatives research head at Axis Securities, explains that the rapid fluctuations in volatility caused many to adopt a cautious stance, preferring to "sit on the sidelines" until greater clarity emerges. S.K. Joshi, consultant at Khambatta Securities, elaborates on the challenges this presents for traders, explaining how the difficulty in predicting market direction leads to decreased trading activity.
Adding to the uncertainty is an ongoing investigation into a large foreign HFT, leading to increased caution among proprietary traders. Mayank Bansal, a UAE-based options trader, notes that some firms have reduced their trading staff pending the outcome of the investigation.
While a Sebi official was unavailable for comment, a source confirmed the investigation's existence. The impact on the exchanges is significant, considering the substantial contribution of equity derivatives trading to their revenue streams.
Data from Equentis reveals the significant dependence of both BSE and NSE on derivatives trading, highlighting the considerable financial implications of the recent downturn in options trading activity.
