Derivative option writers, mostly large overseas funds collecting rewards from buyers of calls and puts, killed, while retail investors and traders were the main victims, experts say.
There were only 12 hours of trading for the derivatives expiration in February when NSE closed the markets. NSE witnesses increased trading activity days prior to the expiration of derivatives, which fall on the last Thursday of each month. Option prices are based on time value, i.e. theta – the rate of depreciation of an option over time. If all other variables are constant, an option will lose value as time approaches its expiration date.
Theta is how much the value of the option decreases each day until it expires. The NSE tech hook cut theta options by nearly four hours of crucial time. Although NSE added almost 90 minutes to trading time, it was largely useless as the stockbrokers did not allow their clients to take new positions. In a near closed market, the FPI net buy on the spot market was £ 28,700. After 3:45 p.m., more than 60 percent of the open positions in Bank Nifty change. And 10.8 lakh contracts on Nifty were trading abnormally.
The call and put option chain shows a price disruption of 50 to 300 percent for various in-the-money and out-of-the-money exercise prices of indices and stocks between 11:40 am when NSE closed the markets and closed trading 5 pm extended.
The share price of the most heavily traded derivatives, including Bajaj Finance, Indian Oil, and Tata Steel, fluctuated 5 to 20 percent as they crashed sharply on BSE between 11:40 a.m. and 3:30 p.m., when NSE stopped trading and rebounded most of their loss during NSE’s extended trading hours. During the extended trading hours, retailers were largely absent and unable to carry out normal activities. In fact, they balanced their positions before 3:30 a.m. when prices were falling and were unable to re-enter the markets when prices started to rise, brokers said.
The majority of tech-driven brokers had their client positions in auto-square-off mode because it wasn’t clear until around 3 p.m. whether NSE – with a 90 percent volume monopoly – would be opened for trading. Brokers Say The Level of Manipulation Was Unusual A disruption was evident when Nifty futures hit a high of 15,524, despite the Nifty 50 spot trading at around 14,900 – a 600 point or 4 percent spread that is the world’s most has never been seen before.
Another surprising element was Treasury Minister Nirmala Sitharaman’s tweet at 4:77 p.m. that the government lifted the embargo on the provision of business to private banks. The Bank Nifty index, which has been experiencing price and data feed issues since the morning, rose nearly 1,400 points during extended trading hours. After Sitharaman’s positive tweet, data and price charts, Bank Nifty saw a rise of around 800 points.
“The decay of options over time is exponential. One day before expiration, when important trading hours are unexpectedly lost, traders panic and have to balance each other anyway, which brings the option writers a profit. It presents a moral hazard as you cannot assess and belittle such expected gains from writers. Wednesday’s event shows how liquidity at NSE has grown together, driving everyone to only trade on one exchange. SEBI should consider a fungible and uniform settlement so that the liquidity is distributed, at least in the case of BSE, at least during crises, ”said Sushil Kedia, founder, expert in kedianomics and derivatives.