Sebi allows stock exchanges to offer incentives to brokers for raising volumes in illiquid derivatives

MUMBAI: Capital market regulator Sebi has allowed stock exchanges to offer incentives to brokers for generating volumes in illiquid securities in equity derivatives segment. Exchanges can reward brokers dealing in derivatives of scrips where average trading volume for the past 60 trading days is less than 0.1% of market capitalisation of the underlying stock.

"The liquidity enhancement scheme will give the exchanges flexibility to launch appropriate schemes suiting their business objectives. This move will develop derivative markets in India, both in terms of depth and breadth," said Madhu Kannan, managing director & chief executive, Bombay Stock Exchange (BSE).

The regulator has asked exchanges to keep liquidity enhancement schemes (LES) transparent and measurable. According to Sebi, exchanges can reward brokers or traders by giving trading fee discounts, adjustment in fees while trading in other market segments, cash payments and also offers shares of the exchange on meeting specific targets.

Low volumes in stock futures and options segment -- especially among stocks that do not fall in any index groups -- have been a cause of concern for both the exchanges. According to market participants, over 85% of overall derivative trading volumes work around index options. Apart from the top-20 index stocks, liquidity is hard to come by in single stock futures. The exchanges have allowed derivatives trading 223 stocks currently.

The National Stock Exchange ( NSE )) has been logging an average monthly F&O turnover of 1.17 lakh crore over the past one year. The BSE lists a monthly turnover of over 4 crore in derivative segment.

"The regulator is trying to prop up derivatives trading by allowing market-making in the segment. We should see an increase in volumes of illiquid F&O scrips if exchanges offer sufficient incentives to market makers or brokers," said Bharat Shah, institutional sales head, Ventura Securities .

The exchanges have been asked to discontinue LES facility once the average trading volume top 1% of market capitalisation (of the underlying shares), or six months from the introduction of the scheme, whichever is earlier. LES can be discontinued at any time with an advance notice of 15 days, the Sebi order said.