The quantum of speculative activity in the capital markets seems to be growing at a much higher pace as compared to investment action, as indicated by the equity to derivatives turnover ratio.
As per data from the World Federation of Exchanges (WFE), the equity to derivatives ratio of India in 2015 is almost 15 times in favour of derivatives. In other words, for every Rs. 100 turnover in equity, derivatives market sees a turnover of Rs. 1,500.
The equity to derivatives ratio hints at the correlation between the turnover in the equity and derivatives segments. A higher ratio denotes high speculation activity.
Among leading markets in the world, only South Korea has a higher ratio at 33. The more developed markets of US and Europe have the ratio at 1.6 times and 4.7 times respectively. China has a ratio of 2.1 times while in Japan it is pegged at 1.9 times.
The derivatives segment comprises of futures and options contracts and is typically used by brokerages and high net worth individuals to bet on the direction of the markets.
It is well known that the Indian capital markets have tilted towards speculative instruments, and policy makers need to understand the implications of a high level of speculative trading activity compared to investment activity, said a BSE spokesperson.
On Friday, the equity segment of BSE and the National Stock Exchange saw a combined turnover of Rs. 18,917 crore, much lower than the combined derivatives turnover of Rs. 1.64 trillion.
NSE, which has more than 95% market share in the derivatives space, did not respond to an email query.
The securities transaction tax, which was introduced on stock market transactions in 2004, is higher on delivery-based equity transactions as compared to derivatives trading. While STT is charged at 0.1% for delivery-based equity trades, it is as low as 0.01% for certain derivative contracts.
There is not much liquidity in the listed companies beyond the top 200 and this makes investors go for derivatives, said Deven Choksey, managing director at KR Choksey Securities.
It is not uncommon for emerging markets to have more speculative usage as markets develop their derivatives products, said Patrick Young, executive director at DV Advisors, a capital markets advisory firm.
