Are BSE's Sensex options volumes reeling under the double whammy of tech issues at the exchange and SEBI's recent changes to derivative rules? The BSE denies that there were any tech issues at the exchange but incidents and brief details have come out on social media platforms. Also, BW got in touch with brokers and BSE insiders to get an idea on the matter.
Let us first go by the data, which shows that options contracts for BSE's benchmark index Sensex witnessed a 66 percent decline on the weekly expiry day of 11 October. Numbers show that on the previous weekly expiry of 4 October Sensex options premium worth Rs 42,991 crores were traded. Comparatively, on October 11, the trading volumes for the same stood at just Rs 14,594 crores - a decline of 66 percent. Not just this, the weekly expiry Sensex option volumes traded are the lowest when compared to the average trading volumes of the past seven expiries, the data shows. In contrast, the NSE has retained its market share at 95 percent, when it comes to benchmark indices, since the average daily premium traded of the Nifty weekly options stands at Rs 55,480 crores compared to Rs 3,155 crores for the Sensex. On the day, when Sensex contracts are not expiring, the Nifty options have a 98 percent market share. What is really happening?
Broadly there could be only three reasons as to why the Sensex options at BSE are losing steam: Changes in the rules of the game by market regulator Sebi, hike in securities transaction tax and issues with BSE's trading systems, say brokers.
Alleged Tech Woes
First let us talk about the trading systems that BSE seems to be struggling with, since it is the only uncommon between both the exchanges.
According to the brokers and BSE insiders, the exchange's trading system have been facing tech issues. There is some speculation that the exchange has issues with packet drop (order packets and data packets) and order confirmation. Going by the market speculation and brokers facing the problem, at the peak level the issue could be of partition slowdown. Last Friday too, in the last hour, these issues occurred, say brokers. A high number of orders during the last hour of the trading day caused a partition slow-down issue (it is a technical term related to hardware set-up).
According to the brokers in the know, the exchange is likely to be trying several options to resolve the issues at LLM layer, which is nothing but a Low latency messaging computer network that can process a large number of data messages with minimal delay. This is important for applications that require near real-time access to rapidly changing data. Insiders also say that the BSE may have been trying to resolve the issue of packet drops by tweaking models with the LLM vendors etc. Even the source code of the systems is being reviewed but so far there is no clue as to how to resolve this issue despite trying multiple things, sources say. The BSE has not said anything specific on the issue faced by the brokers and traders but there are several social media posts on 'X' on the matter. The most prominent posts were by Zerodha, India's biggest broker.
"Due to connectivity issues at BSE, some of our users may be seeing orders in the 'Open Pending' state for BSE F&O orders. This issue is across brokers. We are working with BSE to update the status of these orders," brokerage firm Zerodha shad aid on 'X'. "Contrary to whatever the incorrect media reports are saying, this was an issue that affected most brokers. Unfortunately, there was nothing we could have done about it," Zerodha founder Nitin Kamath had posted.
Besides Zerodha, there are several other posts including from brokerages on X, either complaining about the tech woes or giving brief details of the incidents.
LLMs are special computer driven equipment for doing very fast communications and transactions. BSE has been searching for problems with the outside vendors as they are not able to find the problem inside their software, brokers explain. But as the tech problem persists, orders at BSE are getting cancelled abruptly or getting delayed by hours, which could be fatal since the markets trade on microsecond basis. All of this tech problem could be a reason for the fall in volumes. Over 90 percent of BSE's options premium trade happens only on the expiry day, which has also concerned the market regulator, sources say.
Some time ago, when two senior BSE officials had gone to Germany for an event, they also met officials from Deutsche Borse, whose T7 Systems are under use at the exchange since 2014. But according to the sources, Deutsche Borse may be reluctant to help due to the fact that the original trading systems it provided has undergone severe changes in the past 10 years to adjust to SEBI's frequent rule tweaks and ever changing Indian regulatory scenario.
BSE's Response To BW On The Tech Issue
There are no issues of packet drops or order confirmations as stated in your proposed write up. Further, the systems are designed and built to detect and recover packet drops, if any, to ensure smooth transactions. Capacity enhancement, architecture review and tweaks thereof, source code review, configuration changes and system upgrades, etc. are a continuous and regular process at the exchange. This has been happening even before BSE relaunched its equity derivatives products. BSE is engaged with Low Latency Messaging (LLM) partner for last 11 years and will continue to do so.
Members have reported a few stray incidents of slower response for a very short span of time. However, business has not been disrupted as stated. Notwithstanding, in such incidents the issues were resolved by working with those specific members. As stated, orders at BSE are not getting cancelled abruptly or getting delayed. BSE has been continuing to witness exponential growth in the last one year. Order cancellations are as per the stipulated requirements including members cancellations, orders outside the price range, etc.
BSE continually engages proactively with its existing partners to provide insights for managing even further increases in load in future.
Deutsche Boerse (DB) conducts their Open Day every year where they invite their partners/vendors/solution providers et al for a detailed session with their Subject Matter Experts (SMEs) and they share details about their forthcoming plans and releases. Since BSE is using the T7 solution of DB, we were also one of the invitees. As a matter of goodwill and proactive knowledge gathering, BSE participated in this event to understand the latest developments.
Sebi's Recent Changes To The Rules
Off late, SEBI has been changing rules in the derivatives markets at a pace that brokers say is difficult to keep a track of.
Increased Contract Size for Index Derivatives to Rs 15-20 lakh from earlier size of Rs 5-10 lakh.
Rationalisation of Weekly Index Derivatives Products wherein each exchange can offer only for one of its benchmark indices. Upfront Collection of Option Premium wherein brokers are required to collect the full option premium upfront from buyers, which effectively means that traders should keep cash with brokers if they wish to take advantage of any sudden opportunity. So far, the brokers were allowing traders to use leverage through cover orders, which had reduced the upfront cost of purchasing options.
Increase in Tail Risk Coverage on Expiry Day: For managing intense volatility that usually occurs on expiry days, SEBI has introduced an extra margin in terms of "extreme loss margin." It raises margin requirements for option sellers by 2 percent on expiry days, which according to Sebi could add a layer of protection against sharp price swings.
Intraday Monitoring of Position Limits: As per new rules, brokers' positions will be checked at four random intervals throughout the day instead of earlier practice at the end of the day. This will cut down any attempt by brokers to exceed total market wide open interest.
Removal of Calendar Spread Treatment on Expiry Day: It eliminates the margin benefit for calendar spreads on expiry days. A calendar spread involves holding both long and short positions in contracts with different expiration dates. Till recently, traders enjoyed a margin reduction for these positions on expiry days, but going forward, this benefit will no longer apply.
STT Hike
Securities Transaction Tax (STT) is a tax levied on the sale and purchase of securities, including equity shares, futures, and options. From October 1, STT on the sale of options has increased from 0.0625 percent to 0.1 percent of the options premium. For instance, if you sell an option with a premium of Rs 100, the STT is Rs 0.10 instead of Rs 0.0625.
BSE's market capitalisation has recently touched Rs 65,000 crores. Once the exchange solves its tech woes, the market cap may further move to the stratosphere.
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