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Proprietary traders’ share of equity options trading on the National Stock Exchange (NSE) fell to the lowest in 22 months in August, underscoring the impact of central bank's tighter bank funding norms and the closing auction session (CAS) introduced in the cash market. Their combined share of index and stock options fell by 62 basis points to 47.3% in August from July, its lowest level since October 2024, when it stood at 47.1%, according to the NSE’s latest Market Pulse data. A basis point is one-hundredth of a percentage point. The BSE does not provide a similar breakdown of participant shares. However, analysts said proprietary trading activity in BSE options would also have been affected by the funding norms and CAS. NSE’s average daily premium turnover in equity options fell 15.7% month-on-month to ₹42,332 crore in August. BSE’s turnover declined by a larger 26% to ₹18,672.32 crore. Of the ₹7,879 crore decline in total equity options average daily turnover, proprietary traders accounted for slightly more than half of the reduction, while retail investors accounted for 35%, according to the data. The NSE had a 68.6% share of equity options trading at the end of August, with the BSE accounting for the remainder. Funding curbs, CAS Effective 1 July, banks began requiring proprietary traders to provide 100% collateral for funding, up from 50%, in line with a RBI directive. The move has effectively restricted proprietary traders’ access to bank guarantees (BGs), which assure payments to trading counterparties if a client defaults. In addition, the Securities and Exchange Board of India (Sebi) introduced CAS for stocks with listed derivatives, effective 3 August, to improve price discovery. The session, however, has faced liquidity concerns and contributed to unusual volatility in index options during weekly and monthly settlements. CAS changed the method used to determine prices for 213 stocks with listed derivatives, including Nifty and Sensex constituents. It replaced the earlier volume-weighted model with a single price discovered through an auction during the final 15 minutes of cash-market trading, until 3:30 p.m. Derivatives trading continues until 3:40 p.m. The change has reduced liquidity in both the cash and derivatives markets during the final 15 minutes of trading, analysts said. CAS review may help Sebi is considering changes to the settlement methodology for index derivatives. The options include using a blend of CAS prices and volume-weighted average prices, or reverting to the earlier model for a year before transitioning to a blended system. The regulator issued a consultation paper seeking public comments on the proposals on Saturday. “The funding curbs and CAS have played an equal role in reducing the market share of prop traders,” said D.K. Aggarwal, chairman and managing director of SMC Capitals Ltd. “While the curbs will continue to impact volumes on both exchanges, the revision in derivatives settlement currently under consideration could bring back some proprietary trading participation and volumes.” From BGs to debentures Aggarwal said proprietary traders were raising funds through non-convertible debentures (NCDs) as banks tightened funding norms. Large companies typically issue NCDs for specified terms and at fixed interest rates. These instruments are generally unsecured and rely on the creditworthiness of the issuer. However, the cost of funding through NCDs is significantly higher than that of bank guarantees, he said. While BGs typically involve a commission of 1.5–2%, NCDs carry interest rates of 9-10%, making funding more challenging for proprietary traders.
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