The Securities & Exchange Board of India’s (SEBI) Wednesday order of banning quantitative trading platform Jane Street, which holds dominance over India’s derivatives trades, will hit the volumes at exchanges and brokers.
Experts also cautioned that if there is a second-order impact of the same on other high frequency traders (HFTs), it would create a panic and the cash market could be impacted.
The impact was seen in the share prices of brokerages and exchanges as well. On Thursday, BSE closed 6.4% lower, Angel One down 6%, and Nuvama Wealth Management fell more than 10.6%. In a note, one of the leading brokerages in India said Nuvama’s custody business will be impacted by the move and Angel One’s retail volumes could be impacted if the option writers reduce.
Nithin Kamath, CEO of Zerodha said, “Prop trading firms like Jane Street account for nearly 50% of options trading volumes. If they pull back, which seems likely, retail activity (~35%) could take a hit too. So this could be bad news for both exchanges and brokers.”
However, SEBI sources said that There should not be any major market impact from this enforcement action. In any case, delta-based (future equivalent) limits are now in place in index options, to curtail excessive risk taking without impacting regular participants. “In the long run, the growth in market confidence, and a free and fair market, should aid responsible investing and capital formation,” said the source.
Market experts agree. Some believe that the reaction of BSE today was exaggerated. A market participant who did not wish to be quoted said FPI volumes only account for 3.5% of the exchange’s trading volumes. “Overall the volumes from Jane Street had already been declining since the investigation started,” he said adding that while it will not have a near term impact on earnings the average daily turnover growth will be limited to 15% from 20-25% earlier.
Rajesh Palviya, head of technical and derivatives research at Axis Securities said the expiry day volumes will take a hit of 10-15% due to this move. However, he noted this will reduce the volatility and create a level-playing field for local derivatives traders as the firm had an edge over them due to its size and expertise.
Market players said the bigger risk is a second-order impact on other HFTs, while they have stayed very cautious, if the regulator comes after them, there would be panic leading to squeezing out of options premium which will have an impact on the cash market.
Palviya also noted that this will also create a hurdle for other algo traders and HFTs as there will be no counter-party to absorb the supply.
