Traders may get something new to play with in 2016

What do traders do when the RBI governor pulls a pleasant surprise on the market and spooks it minutes later with a conflicting commentary? Or, for weeks gives veiled hints of what he could do and then does something very different? What if New Delhi chooses to borrow a lot more than what it was expected to? Or, the consumer inflation turns out to be lower than what was feared?

Most traders enter or exit stocks or the Nifty derivatives while only some bet on interest rate futures (IRFs) — a market where the impact of these events work out in a direct and less complex way. IRFs, like any derivative, move with the prices of the underlier which, here, is the Government of India bond. A trader buys IRF or goes long when she thinks bond prices will rise, or bond yields, which reflect the interest rate in the market, would come down; she shorts IRF when the bet that bond prices will fall and rates will harden.

But despite the importance of interest rates, its free movement, and a flood of data, information and events that influence bond prices (and therefore IRFs), most punters have stayed away from this market because live bond prices are still not available to everyone the way stock prices are. Thanks to regulatory concerns emanating from past scams and worries that the market could go against the monetary policy, the bond market is restricted to institutions and large investors having bond demat accounts. Only these investors receive the live feed of gilt prices while others get to know the rates with a lag of one minute — which is eternity for day traders for whom every second matters. This is about to change. Come 2016, this closely guarded market would be opened to public investors.

The central bank and the clearing corporation will provide live data on gilt prices to stock exchanges, general investors as well as brokers irrespective of whether they have demat accounts for bonds. The move has the potential to electrify the market for rate futures which is only Rs 3,000-Rs 5,000 crore a day: equity brokers can sell IRFs to small traders, punters, and corporates who can take positions on IRFs by activating online trading accounts.

So, next year, even if stocks languish and Sebi clamps down on commodity futures in the run up to various state elections, compulsive speculators fishing for new games will have some something new to try their luck. In the beginning, the clearing corporation will release live feed on prices on only those government bonds which underlie IRFs. But that’s good enough to start with.

Live bond prices may sound esoteric and a marginal development in a financial market that is obsessed with stocks. It isn’t. It reflects how regulatory thinking, clouded by massive frauds by rogue traders who abused the bond market more than 20 years ago, is changing; how traders and hedgers, more evolved and better informed, are willing to test a new asset class. For decades, the quaint, opaque world on bonds has been playground for a handful who knew the game. Old timers remember stories how treasury economists with banks and bond houses fished out the inflation rate a few days before it was announced from their peers in the labour ministry in the course of academic conversations. No one suspected foul play – that’s because only few knew how one could make a killing with a boring inflation number. Not any more. Things have changed.