Saturday, September 02, 2006

>FIIs tighten grip on derivatives

The influence of FIIs on the Indian equity cash market is well known. Now, slowly but steadily, their domination is on the rise in the derivatives segment too. FIIs’ contribution to the total turnover in the index futures market has gone up to nearly 45%.

On fewer, but important trading sessions — such as periods before and after the triple witching day — FII activity goes up to almost 80%. This shows the dominance of FIIs when it comes to ‘make or break’ occasions. Triple witching day — the last trading Thursday of a month — is a trading session when a particular month’s futures and options contracts expire.

The trends are important as positions in the index futures chart the course of the market for the derivative month. FIIs dominance in the derivatives market is so overwhelming that an earlier ET Intelligence Group study showed that on more than 90% of the occasions the markets moved in line with FII positions.

In other words, if FIIs are net buyers in the first few days, the benchmark indices will end positive for the month and if they were net sellers, the market would end negative during the derivative month. A derivative month is different from a calendar month.

It starts after the last Thursday of a given month and ends on the following month’s last Thursday. Hence, a derivative month could be longer or shorter than 30 calendar days. The FII impact is calculated by comparing FIIs’ turnover in the F&O segment with the total turnover of the F&O market on the National Stock Exchange. The F&O segment is virtually non-existent on the BSE. As such, it does not affect the calculations.

Compared to index futures, the FII marketshare in the overall derivatives segment is around 35% on an average. But this figure does not paint a true picture. This is because FIIs, the world over, are more active in index futures and not stock futures. Stock futures are only dominant in the Indian market. The world over, single stock futures are a no-show or a low-volume business. Naturally, therefore, they are not on the FII radar.

Dealers tracking the market said in India, FIIs trade in single stock futures mainly to hedge their corresponding position in the cash market. They rarely take a directional view in the stock futures market. In other words, they do not buy or sell stock futures in anticipation of the stock rising or falling.

Stock futures are a hit with the domestic players, who use it mainly for taking directional calls. The options market, on the other hand, hardly figures in the overall F&O game.

Revealing figures

Month Average FII turnover to total turnover in index futures (in %):
Aug (only pre-triple witching) 52.18,
Jul 54.69,
Jun 51.16,
May 54.43,
Apr 45.88,
Mar 25.65,
Feb 30.39
Jan 28.2.

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