New Rules To Discipline Stock Markets

Physical settlement in derivatives trade will significantly curb and control speculative activities.

- Yagnesh Kansara

The Indian stock market, which is considered one of the most speculative markets, is going to witness a major transformation by the end of this calendar year. As we enter 2020, it is going to get more disciplined. However, what do we mean when we say that our markets are speculative and what are the shifts that we are going to witness?

The Indian stock market consists of two segments. First, is the cash market, which is simple and also known as the secondary market, where buying and selling of all the listed securities takes place. The turnover in this market is considerable. Second, is the derivatives market, which is more complex in nature. The market products that are traded here are derived from the underlying cash market. Across the globe, the turnover of this segment is generally large. But, in India, it is stupendous.

Consider the average turnover figures of the Indian market for the calendar year 2018. India’s cash market (daily average) turnover around 35-40,000 crore ($5.7 billion), while that of the derivatives market of around 14.50 lakh crore ($207 billion) and this turnover on the settlement day (last Thursday of the month) averages out to be 17.78 lakh crore ($254 billion). No stock exchange in the world is close to such a huge trading volumes. There are several reasons for it. Most importantly, because all the derivatives contract traded on the Indian market are cash settled. This has encouraged speculation and has resulted in huge volumes and turnover on the bourses. However, it is considered highly risky from certain parameters.