Derivative volumes touch record ₹17,350 trillion in Apr-Oct

In comparison, average daily cash market volumes over the same period were lower at ₹55,173 crore against ₹70,338 crore because of reduced retail and proprietary trades.

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In the derivatives segment, the market share of proprietary trades as a proportion of notional turnover increased by 2.8 percentage points to 50.9%, while that of retail increased by 10 basis points to 28.5% in the first half of the current fiscal from the same period of the previous fiscal, according to NSE data.

“Clearly, retail and pro (proprietary) interest is predominant in the derivatives segment, primarily index futures and options, over the past few years,” said Rajesh Palviya, derivatives head at Axis Securities. “In October, too, one expects the retail and pro participation to have risen.”

Market analysts attribute the surge to the introduction of weekly Bank Nifty and Nifty options in 2016 and 2018 respectively.

The market share of retail investors as a percentage of notional turnover in derivatives rose from 23% in FY16 to 28.5% in FY23 till the end of September 2022. During the same period, the share of proprietary trades rose from 49% to 50.9%, while FPI market share fell from 12% to 7.8%, according to NSE data.

Derivatives derive their value from underlying indices such as Nifty, Bank Nifty or stocks. They include futures and options contracts, which can be used to hedge underlying stock portfolios or simply to speculate on markets.

Participants include proprietary traders, brokers who run their own trades, retail (individual domestic investors, NRIs, sole proprietorship firms and Hindu undivided families), foreign portfolio investors, domestic institutional investors, and corporates. FPIs cumulatively hold around $565 billion of Indian equities and normally hedge their portfolios by shorting index futures such as Nifty or Bank Nifty, or by buying put options.

Proprietary traders normally act as counterparties to those wanting to hedge or speculate, said Rajesh Baheti, managing director of Crosseas Capital, one of the largest high-frequency traders in India.

“Pro traders normally act as counterparties to both hedgers and speculators, providing the liquidity needed to make the market efficient and ensuring healthy price discovery. They normally do intraday trades and act as sellers of options,” Baheti said.

Futures contracts facilitate the purchase or sale of underlying indices or shares at a pre-set price for delivery on a future date. Options include calls and puts. A call option facilitates the purchase of an underlying index or share at a fixed price called premium. A put option allows sale of an underlier in exchange for a premium.

Retail or individual investors have largely been attracted to index futures and index options more lately, the data showed.

The share of retail has risen by 1.7 percentage points to 31.9% in index futures and 1.8 percentage points in index options to 35.8% in index options in H1FY23 from the corresponding period of FY22. In the case of proprietary, the share in index futures rose by 3.8 percentage points to 35.2% and 1.1 percentage points to 43.4% in index options.