On Tuesday, the securities regulator put up proposals that may reduce market maker and trading margins and decrease liquidity in the $4 trillion futures and options market.
India intends to curb the fast rise in stock derivatives trading, which might pose a threat to profits for local and international quant traders operating in the country's options market.
On Tuesday, the securities regulator put up proposals that may reduce market maker and trading margins and decrease liquidity in the $4 trillion futures and options market.
Citadel Securities LLP and Optiver, two high-speed trading businesses, have been drawn to India by its rapid rise to the top of the global stock derivatives market. The potential for large gains in the market was highlighted in April when the US-based Jane Street Group said that a method used in India yielded $1 billion in profits, drawing interest from all around the world. This also highlights the fact that smaller investors often find it difficult to compete with the major players in the stock market.
"High-frequency traders will find the options market less appealing as liquidity decreases because of the significant widening of the bid-ask spread," said Narinder Wadhwa, managing director of SKI Capital, an investment business located in New Delhi. Retail investors and HFTs were engaged in a game of cat and mouse. There will only be cats on the market if the mice go.
The regulator suggested fewer contracts, larger margins on expiration days, and a significant rise in the minimum contract size for index derivatives. In an effort to discourage family savings from being used for speculative trading, officials recently surprised the market by raising stock taxation and option trading transaction expenses.
Driven by millions of individual investors, India's notional derivatives turnover reached a record $6 trillion in February, up from less than $150 billion five years before. Authorities have issued several cautions in response to this surge in retail involvement; the finance ministry has even connected excessive risk-taking to gambling.
The profitable prospect has prompted international high-speed trading companies to grow in India. One of the largest companies in this market globally, Optiver, established an office in Mumbai last year. To expand its operations in India, Tower Research, Citadel Securities, and Jump Trading are all seeking traders and analysts.
"Market makers' profitability will be affected if derivatives volumes decline," said Anant Jatia, the chief investment officer and founder of Greenland Investment Management, a systematic investing company with over $1 billion in assets under management. Jatia is located in Mumbai. Nevertheless, I anticipate that market participants will swiftly adapt to the new situation.
According to Jefferies Financial Group, the proposed regulations might impact as much as 35% of the derivatives premium turnover. Trades anticipate a return to largely monthly contracts as exchanges phase out weekly options contracts, which were a major factor in the trading boom.
According to Tejas Shah, head of Equirus Securities Pvt.'s derivatives trading, as the quantity of traded instruments decreases, the days of trading companies turning a billion-dollar profit are probably coming to an end.
As the Indian market returns to its earlier days, "everyone will now have to sit down and recalibrate their current strategies," he said.
No comments:
Post a Comment