'Lots' of troubles for retail futures players

MUMBAI: Absence of revision in the lot size structure of futures and options (F&O) on NSE in the past many months despite the sharp run up in stock prices, is proving to be unviable for retail investors. Analysts believe that this is unhealthy for the development of the F&O segment, particularly at a time when foreign inflows into this segment has shrunk after the curb on investments through P-notes.

Lot size refers to the number of underlying securities in an equity derivatives contract. Stock exchanges, in consultation with the market regulator Sebi, sets the minimum lot sizes and makes changes as and when required. The lot size is multiplied with the share price to determine the contract size whose value has to be at least Rs 2 lakh at the time of its introduction.

For instance, if ABC is trading at Rs 500/share and since the minimum contract has to be at least Rs 2 lakh, its lot size will be 400 shares. So, if ABC doubles to Rs 1,000/share and lot size remains at 400 shares, then the contract size rises to Rs 4 lakh.

Since the last major revision in the lot size structure earlier this year, many stocks with presence in the F&O segment have more than doubled. For instance, the current contract size of Jindal Steel is at around Rs 19 lakh from roughly Rs 5 lakh in August, Essar Oil is at Rs 17 lakh from Rs 2.9 lakh in August, Neyveli Lignite at Rs 15.6 lakh from Rs 4.4 lakh in August.

“Short-term traders, who function on thin stop losses, are incurring losses because of the sharp movements in many of these stocks,” Geojit Financial Services’ head of technical and derivatives research Alex Mathews said.

Several analysts believe the situation calls for a change in the lot size structure to bring in wider participation among investors as it is felt that the introduction of mini futures is still some time away. Dolat Capital’s vice-president (derivatives) Vijay Kanchan said, “They (authorities) can reduce the actual minimum value of the contract (from Rs 2 lakh currently), which will invite more participation.”

The finance ministry is believed to be in favour of reducing the value of the minimum contract size to Rs 1 lakh from the existing Rs 2 lakh. But, authorities in Mumbai are not keen on reducing it at the moment as they feel it should happen only after the market matures further.

A Mumbai-based broker said, “It will be an open invitation to unwanted speculation. Authorities are just about getting a grip on things after the recent surge. So I don’t think, they should spark another rally, which will lead to a bubble.”