Sebi's F&O de-addiction campaign throws up an unlikely winner - BSE

With markets regulator Sebi playing tough cop to de-addict retail traders from derivatives, India's oldest stock exchange BSE is being seen as gaining market share in the F&O market from rival NSE. While Sebi's circular was bad news for investors in stock broking companies, shares of BSE jumped over 7% to Rs 2,607 on Wednesday morning.

Among the seven proposals suggested by Sebi, the limiting of weekly options contracts to only one benchmark index of the exchange will severely hit NSE options volumes as it has 4 weekly expiries.

BSE, on the other hand, has just 2 index option contracts - Sensex and Bankex. Once the new rules come into force, there will be only 2 weekly contracts - one each from BSE and NSE.


As a result, the smaller player may benefit as trading activities may spillover to BSE products from discontinued products of NSE.

"With just 2 expiries now – BSE may see higher volume traction and faster market-share gains thereby further limiting volume impact," said Devesh Agarwal of IIFL Securities.

For BSE, the removal of the Bankex weekly contract can impact EPS by 7-9% over FY25-27.
"In our scenario analysis, gains from the spillover of trading activity from discontinued products can offset EPS impact and in the event of a moderate industry-wide impact of SEBI measures, can even drive EPS upgrades," said Jayant Kharote of Jefferies.
The brokerage expects derivatives to become about 50% of BSE's revenues by FY27 from about 13% in FY24.

Currently, weekly premiums make up about 65% of overall industry premiums, and depending on the choice of the index (to be continued) by exchanges, a supply of contracts amounting to about 35% of industry premiums can be removed, according to estimates by Jefferies.

Also read | Sebi begins crackdown on F&O mess, suggests 7 measures to save retail traders

Among other measures, Sebi has also proposed increasing the minimum value of derivatives contracts from Rs 5-10 lakh to Rs 15-20 lakh in the first phase and Rs 20-30 lakh in the second phase.

"Increasing the contract size by 2-3x would also constrained small retail investors – however we believe this may lead to a higher decline in investor count than volumes. Finally other measures like increasing ELM around expiry, and the withdrawal of calendar spread margin on expiry will increase the margin requirements and thereby could impact the liquidity. Based on our initial estimates we expect a 30-40% impact on market volumes," IIFL Securities said.

It estimates a 25-30% impact on NSE’s FY26 earnings and 15-18% for BSE. "BSE at Rs 2400 is trading at 26x FY26ii EPS – assuming a 25% earnings cut the stock would trade at 34x. Post revision, BSE’s earnings are likely to compound at 15% Cagr over FY26-28ii. We assume stock should bottom out at 30x FY26ii revised EPS (Rs70). As of now we maintain our base estimates and await clarity on final regulations," IIFL said.

According to market analysts, exchanges and retail-focused brokers will be the most affected by the proposed changes while clearing members like Nuvama (Asset Services business) cater to institutional players (HFTs / FPIs) which are less impacted but may see some second-order impact.

Shares of 5paise were trading flat, Angel One 3.5% higher while Motilal Oswal was up by 2.5%.