Be Wary In A Risky Market

The events in the Euro zone are sending across vibes that are not at all encouraging. With the socialists coming into power in France and the failure of the pro-austerity coalition in Greece, chances of an improvement in the situation look remote. These ‘developments’ are giving rise to speculations of exit of Greece from the European Union which will further aggravate the problem.

On the domestic front, our markets witnessed a hefty sell-off. The depreciation of the rupee that has crossed the Rs 54/USD mark, an all time low, is playing spoilsport for sentiments. Adding to the woes are the negative IIP numbers for March 2012 that came out at -3.5 per cent. The Sensex and Nifty fell by more than seven percentage points each in the last fortnight. There is not a single index on the sectoral front that has managed to close in the green. The main draggers on the sectoral front were the Banking and Power companies, with their benchmark indices falling by more than ten percentage points in the last fortnight.

The global markets have also not been spared from the crisis, with the main indices across the developed world witnessing a southward movement.

Going forward, there is ambiguity on where the markets and the economies are headed. We are of the opinion that extreme caution must be maintained before taking any risky bets in the market.

LEIPing Ahead With Force

Among several initiatives rolled out over the last three years on the product and technology fronts, the most significant one has been rollout of the Liquidity Enhancement Incentive Programme (LEIPS) in September 2011. This has led to a major growth in the Derivatives segment. With daily volumes crossing Rs 35000 crore in the Derivatives segment and member participants of 120 members daily, there is lots of action in BSE’s F&O segment. With every new rollout in the LEIPS program, the volumes and open interest have steadily grown over the last seven months to reach market shares of 15-20 per cent in the Index Derivatives segment.

LEIPS III, part of LEIPS series in the BSE’s Derivatives segment, focusses on Options contracts in the Sensex (India’s most tracked market index) with a view to build a healthy Options book in the Sensex and infuse greater impetus and focused participation. It incentivises both Market Makers (MMs) and General Market Participant (GMPs) by payment of cash for their participation as per prescribed terms and conditions.

With effect from 2nd May, 2012, the Exchange has made certain key amendments in terms and conditions of LEIPS-III programme so as to enhance the effectiveness of the scheme:

• Relaxation in quoting obligation for Level 2-Quote Based Obligation for Market Makers
• Revision in spread and size specification for Level 2-Quote Based Obligation from existing absolute spreads for each moneyness to spreads expressed as a percentage of the bid price
• Introduction of additional incentive for fulfilling Level 2-Quote Based Obligation in all 14 market-making contracts
• Introduction of Level 3-Quote Based Obligation including 3 layered, 2 way quotes in all 14 market making-contracts.

Encouraged by the positive response and robust performance the Exchange has launched LEIPS-IV from 2nd May with a goal of providing greater momentum and entailing specialised participation in Futures on Index underlyings.

The LEIPS-IV programme focuses on Futures in the Sensex and Bankex indices. It incentivises both MMs and GMPs by payment of cash for their participation as per prescribed terms and conditions. Active trading members of Futures & Options segment of the Exchange who have already signed up in LEIPS-II programme as General Market Participant (GMP) shall be treated as GMPs in LEIPS-IV programme as well. Similarly, Market Makers (MMs) who have registered as MMs in LEIPS-II programme for Sensex Futures and Bankex Futures contracts shall automatically qualify to be a MM in LEIPSIV programme.

LEIPS-IV envisages the MMs to have a continuous quoting obligation with specified size and spread in Sensex Futures and Bankex Futures contracts. The programme offers four types of incentives to market participants:

• Trading volume based cash incentives paid on daily basis to MMs and GMPs
• Open Interest (OI) based cash incentives paid on daily basis for average daily OI to MMs and GMPs
• Quoting obligations based cash incentives paid on daily basis to MMs
• Lower transaction fees for all trading members

The Exchange has been regularly amending the terms and conditions of LEIPS programme based on overall progress of the programme, market feedback and policy changes. Watch this space for the latest at the BSE.