Securities transactions tax hindering growth of futures trading: SEBI-DRG study
18 Oct 2013
A joint study by the Securities and Exchange Board of India (SEBI) and Development Research Group (DRG) has found that the dominance of futures market over options has diminished after the introduction of the securities transaction tax (STT) even as the spot market continued to dominate over the futures and options market.
The study found that spot-market has been dominating the futures and option markets and that the dominance of futures market over options has diminished after the increase in STT.
The study proposed that the STT on protective-put and hedged-call positions should be reduced to give a boost to the option market.
A study of the futures and options on NSE Nifty and ten other randomly-selected NSE stocks has found that spot-market has been dominating the futures and options markets and that the dominance of futures market over options has diminished after the increase in STT.
SEBI on Thursday released the study titled, `Impact of Increased Derivatives-Trading in India on the Price-Discovery Process', which is co-authored by Banikanta Mishra, Sarat Malik and Laltu Pore.
The objective of the study is to examine whether the introduction of financial derivatives led to better price-discovery (PD) in India.
While the derivatives and spot markets exhibit a long-term relation, the present study found the existence of long-term relationship between futures and options on individual stocks, something that had not been studied hitherto.
The study, which claims to be the first to analyse whether introduction of financial derivatives led to better price discovery in India, tries to study the volatility of the price or return of the underlying asset and the whether the lags in price-formation in the derivative market are contemporaneous with, or is independent of price-formation in the spot market.
The study also looks at the liquidity in the derivative market (as measured by the trade-value) and try to correlate it to the price discovery process.
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