NSE Updates : The Bombay Stock Exchange on Monday raised specific derivative contract transaction fees. The overall charges on the Sensex and Bankex options contracts in the equity derivatives segment would see an increase to ₹3,250 for each crore of premium turnover from Tuesday, October 1. This could impact certain kinds of traders and investors trading and investing consistently within these segments of the stock market. Meanwhile, other contracts in the equity derivatives will retain similar charges.
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Charges Recovered by BSE on Derivatives
In simpler words, BSE has offered to charge ₹3,250 per crore for premium turnover on Sensex and Bankex options. Which means premium turnover is the accumulation of premium or the price that has been paid to purchase an options contract. An options contract confers rights, but not the obligation to buy or sell a security at a specified price before the contract expires. Specifically, it is the aim of the increase in fees that the traders trading Sensex and Bankex options will be deterred.
For other contracts, however, the fees do not change. BSE has kept transaction fees for Sensex 50 options and stock options at ₹500 per crore of premium turnover value. Or, in plain terms, the fee in such cases is much lower and the cost of entry into these segments does not increase considerably.
Interestingly, BSE does not charge any transaction fees for index and stock futures. This way it remains cheap for investors. Stock futures and index futures allow investors to agree on the price of buying or selling a stock or an index at some later date. In that case, keeping the transaction costs for futures at zero would remain an essential factor for BSE in maintaining liquidity and attracting more participation in these instruments.
This change in fee structure at BSE might be justified by market demand and operational cost. Charging more for premium option contracts like Sensex and Bankex might seem like an attempt of BSE to balance out the market activity with the cost of operations.
Transaction Charges at NSE
India’s largest stock exchange, National Stock Exchange, has also revised the transaction charges for its various segments in parallel. Here the new transaction charges will come into effect for the cash market, equity futures, equity options, currency futures and options, for traders and investors.
The cash market will attract a transaction charge of ₹2.97 per lakh of traded value on both sides of a transaction. Therefore, with every ₹1 lakh worth traded, traders will incur a cost of ₹2.97, meaning it is going to be a small but a very significant cost for high-volume traders.
In the equity futures segment, NSE has charged ₹1.73 per lakh of traded value, to both sides as well. This fee structure will bear implications on the equity futures that relate to agreements regarding the buying or selling of a stock at a later date for a pre-defined price-the same goes for stock futures.
One of the big fee increases is from NSE as far as equity options are concerned, for which the transaction fee has been fixed at ₹35.03 per lakh of premium value on both sides of the trade. This is much more than the fees levied in futures; such a higher risk and reward associated with the options contract is evident in it. Equity options are rights to either buy or sell a particular stock at a specific price; hence, the value of the premium determines how much it would cost to acquire such an option.
It charges a transaction fee of ₹0.35 per lakh of traded value on each side for its currency futures. Currency futures are basically financial contracts issued by the exchange that obligate a seller to sell or an oblige a buyer to buy a currency at a future date at a predetermined price. Here again, the fees are pretty low, so the segment is cheap to trade for traders.
For currency options and interest rate options, transaction fee has been decided at ₹31.10 per lakh of premium value on both sides of the trade. Currency option gives an investor the right but not an obligation to exchange money in one currency for another at a predetermined exchange rate on a specific date. Meanwhile, interest rate options are derivatives that enable investors to hedge or speculate on future movements in interest rates.
Impact on Traders
Fee revisions by the two exchanges would vary their effect on traders as it depends on the segment which one is involved in. For instance, the options traders on both of the exchanges would see an increase in the cost of a transaction which may change their strategy in trading. More premium options such as Sensex and Bankex on BSE as well as equity options on NSE may cost more. This can lead to lesser volumes in these segments, especially among the small-time traders who generally operate with a lower capital.
On the other hand, futures contract traders may still find the contracts attractive, especially in the index and stock futures categories, given the lack of, or relatively low, transaction fees. This could maintain, if not boost, the liquidity in futures markets given how traders will seek cost-effective ways through which they can hedge their positions or speculate on future price movements.
Why do Transaction Fees Matter?
Transactions seem to play a very important role in the mechanism of financial markets. The fees levied upon transactions form a cost to the traders. Rise and fall can greatly influence profitability because of high-frequency trading, which happens many times a day. To the BSE and NSE exchanges, these transaction fees constitute an extremely important source of revenues. However, if they go too high, the trading activity could well fall, which may reflect lower volumes and eventually reduce market liquidity as well.
In doing so, they attempt to spread these charges across the various segments while at the same time retaining an active and robust trading environment. The traders, however, have to work with such charges in place when trading in derivatives where the difference between profit and loss can be quite significant.
What Are Derivatives and Why Are They So Popular?
Derivatives are financial contracts whose value is derived from an underlying asset, such as stocks, bonds, currencies, or commodities. Among others, some very common derivatives include futures and options that facilitate hedging risks or speculating on the future price movements in the underlying assets.
The derivatives market has picked a lot of pace in India over the past few years as BSE and NSE both offer wide-ranging products. Futures and options are highly sought after by traders who wish to utilize price volatility in the market without an underlying asset being directly held.
For instance, the options contract can be used to extract premiums from movements in the price of stocks by making a small initial investment. Futures contracts, on the other hand, allow for lock-in of an asset price at a future date, which is useful for both hedging and speculation.
Risks exist when trading in derivatives. Even though high returns are achieved through leveraging of these products, it goes with the chance that the loss is highly probable and enormous. Therefore, this product is rarely suitable for professionals who understand the market.
How the New Fees May Translate to Change in Market Participation
The new transaction fees, especially for options contracts, may shift some market participants around. For one, retail investors, who are generally trading in smaller quantities, would be turned off by the higher fees, especially in the options. Institutional investors, on the other hand, who trade in larger quantities, would continue their active participation since the total trading costs would be spread out over a large capital base.
The real challenge here will be to monitor how these fee changes impact market dynamics. In this case, if the new fees adversely affect the trading volumes, especially in the options segment, they will need to review their fee structures again to ensure they don’t damage market liquidity.
Conclusion
In short, the BSE has now increased equity derivatives, including options contracts on the Sensex and Bankex indexes to ₹3,250 per crore of premium turnover, from October 1. Other contracts continue to be the same. The NSE, too, rolled out various new transaction charges in its equity futures, options, and currency derivatives segments. These will vary through the different types of traders and make it such that options traders experience their highest rate increases, while futures traders are relatively cheaper. It will also be interesting to find how trading volumes and strategies shift as a result of this new fee structure.