75% of NSE’s trading revenue now comes from options

75% of NSE’s trading revenue now comes from options

Options trading has become a cash cow for the National Stock Exchange of India (NSE), which now has a near monopoly in equity F&O trading.

More than two-thirds of NSE’s trading revenue now comes from options trading volumes, according to estimates by foreign brokerage CLSA. This number was 25-30% before the outbreak of the pandemic. The dependence on the cash market, on the other hand, has significantly fallen over the years despite the increasing market share in the segment.

The share of options trading from individual investors has increased from pre-Covid levels of 25-28% to 36% at present. The share of proprietary traders declined over FY16-20, but increased thereafter.

The NSE is more competitively priced versus the BSE on transaction charges in cash market trades. NSE charges Rs 32-34.5 for every million rupees of traded value per month, against Rs 37.5 charged by the BSE, according to CLSA. However, in derivatives, NSE’s transaction charges are significantly higher than that of the BSE. The NSE charges Rs 25,000 up to first Rs 30 million of premium written for equity options per month and Rs 330-530 thereafter, against Rs 250 charged by the BSE.

Notably, a recent study by the Sebi showed that the number of individual traders in the equity F&O segment rose 500% to 4.5 million at the end of FY22, from 7.1 lakh during FY19. What’s more, 90% of individual traders in this segment incurred net losses.

Exchanges charge a transaction fee on trades they execute. The fee paid bybrokers depends on the product and the size of the trade. CLSA reckons that trading services made up the lion’s share (more than 75%) of total revenue from operations for NSE in the previous two financial years, against an average of 66% over the past decade.

To be sure, the exchange has been steadily gaining market share in the cash market as well — from 83% in FY13 to 93% in FY23, data from CLSA show. This has been primarily been aided by the introduction of co-location facilities in 2009, which has led to a sharp spike in algorithmic trading, the brokerage observed.

Cash equity volumes for the industry have been cyclical over the years, characterised by periods of no-growth, followed by sudden spikes in volumes. Volumes are up 5x over the past 10 years, growing at 18% CAGR, and 22x over the past 20 years, at 17% CAGR.

Apart from trading services, key sources of revenue for the NSE include co-location charges, data feed services, tech services, listing and licensing services and clearing and settlement.

There are 70 million unique customers registered with the exchanges. Of these, about 34 million are active and have traded at least once in the past 12 months. The past three years of Covid witnessed an acceleration in the active client count. A lot of customer acquisition is from smaller towns and cities. In FY22, cities beyond the top 50/100 ones accounted for 57%/43% of new investor registrations for NSE, indicating a widening interest in equity markets, according to CLSA.

While world exchanges offer trading services across a number of categories such as equities, bonds, currencies and non-equity derivatives, India is still more of an equity market. More than 95% of trading volumes on the exchanges come from equities, both cash and F&O.