The National Stock Exchange of India said on Tuesday that it is shifting the Futures & Options expiry for the Bank Nifty index to Friday from Thursday (the practice at present). The new expiry will come into effect next month. Ashley Coutinho look at what the shift means, particularly for the BSE.
What is the Bank Nifty?
The Bank Nifty is a sectoral index that was adopted in 2003 and is one of the most frequently traded indices in the Futures & Options (F&O) market. It consists of 12 banking stocks traded on the NSE, including both public and private sector banks. HDFC Bank, ICICI Bank and Kotak Mahindra Bank have the most weight in the index. The index is considered as highly liquid and well capitalised, given it consists solely of banking sector stocks. The Bank Nifty index can be used for options trading as well as to benchmark fund portfolios. It has gained significant popularity among investors and traders given the high correlation it has with the Nifty, which is the NSE’s benchmark index. Given it is a weighted index, it helps investors make informed choices.
The rationale for the move
Some of the volumes in the Nifty 50 index were being cannibalised by the Nifty Bank index as the expiry day was the same, and the latter enjoyed higher trading volumes. Changing the expiry day for the two indices may solve this problem. Traders can bet on Nifty 50 on Thursday and punt again on Nifty Bank the following day with the freed-up capital. NSE’s previous experiment with moving the F&O expiry day for the Nifty Financial Services index to Tuesday may have influenced this decision. The move may also help counter any competition from rival BSE in the F&O segment. BSE had earlier moved the expiry to Friday, effective May 12. Earlier this year, NSE had announced a reduction in Nifty Bank lot size to 15 from 25, from July 2023 expiry contracts. The move is also expected to bring down volatility in the Nifty.
Will the move impact the BSE?
In recent times, there has been a notable shift in trading volumes towards the options segment, particularly index options, due to the implementation of peak margin norms. Recognising this trend, the BSE has been actively focusing on index options and recently introduced a Friday expiry for Sensex and Bankex option contracts. It also reduced the lot size of Sensex contracts from 15 to 10 and the Bankex contracts from 20 to 15, hoping to attract smaller investors. The exchange has seen some success. The F&O turnover hit Rs 69,422 crore on its third weekly expiry last month, four times the turnover of the previous expiry, according to reports. Liquidity and transaction charges are the two key factors determining the success of expiry products, said experts. NSE currently holds an advantage in terms of liquidity, whereas BSE offers lower transaction charges. “The availability of multiple expiry options will not be the sole determinant of success. Instead, liquidity and transaction charges will play crucial roles in attracting market participants and ensuring the viability of these products,” said Parth Nyati, founder, Tradingo.