Why exchange traded currency derivatives volumes slowed in 2023

Trading in exchange traded currency derivatives (ETCD) slowed in 2023, the most since 2017.

Data from the Securities Exchange Board of India (SEBI) show that in the National Stock Exchange (NSE), 45,748lakh crore contracts were traded last year. This is up just 6 per cent from 43,318lakh crore contracts traded in 2022. It is also the slowest since 2017 — the year when volumes fell by 2 per cent.

The turnover volume in 2023 was ₹379.53lakh crore. This was just a 10 per cent rise from ₹344.22lakh crore seen in 2022. This was also the lowest since 2017 when the turnover volume dropped by 6 per cent.

The major reason for the slowdown in the volume was the low volatility. Anindya Banerjee, VicePresident, Currency Derivatives Research, Kotak Securities, says: “The volatility in 2023 primarily was the lowest since 2002 which has caused the volumes to come down.”

The trading range (spread between high and low) for the whole year was just ₹2.57, the lowest since 2002. The spread in the first quarter of the calendar year 2023 was ₹2. But that narrowed to ₹1.24 and ₹1.6 in the second and third quarter, respectively. In the final quarter of 2023, the spread was just ₹0.55.

HEDGERS STAY OUT

The research head of a leading institution, who did not want to be named, said that the trading volume from corporates that ideally use the exchange traded derivatives for hedging had come down drastically last year. He said corporates contribute about 7 per cent of the total trading volume on average. That had come down to about 4 per cent.

According to Vikrant Sharma, Founder and Fund Manager, Kushak Capital Management, low premium and high cost had kept the hedgers out of currency derivatives last year. “Hedging happens majorly on the exports side. Low forward premium and low volatility made the exporters to keep their exposures unhedged. Low interest rate differentials, too, did not give any incentive for them to hedge ”.

TRADERS’ TAKE

According to experts, about 20 per cent of the trading volume in currency derivatives comes from the retail traders. Narrow range movement, high cost, low option premiums have reduced their participation. Manish Maisheri, an independent currency trader, says, “My trading volume in rupee reduced to 2 per cent of my total trades last year. Earlier, it used to be 3040 per cent.”

Alternatively, Manish Maisheri, had increased his trading volume in other currencies such as the euro, pound and even in index derivatives. Another trader, who did not want to be named, said that he shifted about 60 per cent of his capital from currencies majorly into equities and to some extent in commodities.

Increase in trading cost coupled with low volatility was also another reason for traders to stay away from the currencies.

Last year the Securities Transaction Tax (STT) was increased on the sell side of Futures and Options. from 0.01 per cent to 0.0125 per cent. For options, the increase was from 0.017 per cent to 0.021 per cent.

“Considering the cost, a trader will not prefer to be in a place where there is a tight trading range. Rather he would shift to assets such as equities that had good volatility last year,” adds Vikrant.

While the company’s order book is robust, investors can book profits in the BHEL stock owing to the runup in its price and valuation leaving little margin for safety.

BHEL is a power equipment manufacturer with a dominant market share in the thermal market. The company is involved in design, engineering, manufacturing, construction, testing, commissioning, and servicing of a diverse array of products and services within the power and industry segments.

ORDER BOOK

The company’s order backlog totalled ₹1,08,618 crore as on December 31 with further contracts for over ₹30,000 crore coming in the power segment alone.

However, this strong momentum appears well factored with the stock trading at one year forward PE of 71 times now.

Even during FY2011, when the business was strong and order book peaked at ₹1,64,145 crore, the stock traded at a forward P/E ratio of 15 times.