Price recovery or price discovery: what do you prefer as a stock market trader or an investor?
As you would know, derivatives are meant for price discovery. As Securities and Exchange Board of India (SEBI) describes, derivatives markets reflect the expectation of spot prices in the future.
Since stocks in the derivatives segment aren’t constrained by a fixed circuit limit, they often experience rattling volatility in the cash market. Thus, what happens in the Futures and Options (F&O) market also affects individual investors in the cash market.
According to SEBI, 40 scripts (out of 199 traded in the derivatives segment) experienced intraday fluctuation of over 20% in last six months.
The ratio of derivatives turnover to cash market turnover spiked up from 2.9 times in 2009 to 29 times in the current financial year—one of the highest in the world.
Such skewed derivative market operations, in the absence of corresponding cash market participation, sometimes gives rise to massive speculation.
To curb excess speculation in the derivatives market which affects gullible investors in the cash market for no fault of theirs, SEBI has swung into action.
Bottom 50 stocks as per their average daily market capitalisation in December 2018 will move to the physical settlement from April 2019 onwards. The next 50 will follow suit from July 2019 and the remaining ones will move to physical settlement from October 2019 onwards.
On February 11, 2019, SEBI released a discussion paper which proposes three additional measures to protect investors in the cash segment from extraordinary price movements guided by the derivative market action. SEBI has sought comments from all stakeholders by February 20, 2019.
More protection for investors
Possible impact on markets
SEBI has proposed corrective steps to stave off extreme market speculations. What do you think about them?
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