IMPACT OF BANK NIFTY LOT SIZE CHANGES IN 2023: AN IN-DEPTH ANALYSIS

The National Stock Exchange (NSE) has decreased the market lot size for Nifty Bank futures and Options to 15 from 25 in an effort to increase customer participation in the derivatives market. The new regulation will take effect with contracts entered into on July 1, 2023.

“Only the far month contract, or contracts that expire in July 2023, will be changed for market lots. The market lots for contracts maturing in April 2023, May 2023, and June 2023 would not change.” NSE stated in a circular. It further added that all following contracts (i.e., the monthly expiry of July 2023 and beyond) will have amended market lots. Other market lots of derivatives contracts on indices, such as Nifty Financial Services, Nifty Midcap Select, and Nifty 50, have been left unaltered by the stock exchange at 40, 75, and 50, respectively.

What are Lot sizes? How are they determined in Futures and Options?

Lot size is the number of contracts or shares that can be traded at once. In the context of index futures, lot size determines the quantity of index contracts that can be bought or sold. It is a critical parameter that affects position sizing, risk management, and capital requirements for traders and investors. A smaller lot size provides more flexibility for retail participants with limited capital and allows for finer adjustments to trading strategies.

At first, SEBI set the suggested lot size at Rs. 2 lakh. The lot size would be set at the appropriate number of shares, giving a notional value of more than Rs. 2 lakh when multiplied by the current market price. To discourage retail investors from engaging in F&O speculation, SEBI adjusted the recommended lot sizes at over Rs. 5 lakh in 2015. In order to ensure that only knowledgeable investors and traders really deal in the F&O market, new additions to the F&O list are being included with a minimum lot value of Rs.7.50 lakh, and there is a suggestion to change the lot value to Rs.10 lakh. The initial margin needed for 1 lot of Nifty when the lot value was at Rs. 2 lakh was only about Rs. 25,000, making it affordable for the majority of small traders. In the majority of cases, they suffered significant losses because they were unaware of the true consequences of F&O.

Reasons for Bank Nifty Lot Size Changes in 2023:

According to the Exchange Circular (NSE/FAOP/44482), the value of the contracts in the Futures & Options category may not be less than Rs. 5 lakhs at the time of introduction. For each underlying, the permissible lot size for futures and options contracts shall be the same, or such other lot size as the Exchange may specify from time to time. In its circular, CIR/MRD/DP/14/2015, dated July 13, 2015, SEBI has set forth the revised methodology for revising the lot size for derivative contracts as the lot size for derivative contracts in the equity derivatives segment shall be fixed in such a way that the contract value of the derivative on the day of review is between Rs. 5 lakhs and Rs. 10 lakhs.

Impact

Forecasted benefits of the change

1) Enabling better risk management for traders: Having enough margin money to trade is the biggest issue. A losing trade requires additional funds in order to adjust or hedge positions in order to generate a profit because every trader has a finite amount of capital. Trading in lesser quantities can lower the trader's risk and give them a cash reserve to use as a safety net in case they need to change their trades.

2) Portfolio hedging with lesser margin allowed: Reduced contract value will result in lower margin requirements, which will benefit small retail traders with portfolios of 6 lakhs or less by enabling them to protect against market volatility and uncertainty with less margin.

3) Increased Liquidity: Although Bank Nifty is a fairly liquid contract, the Bank Nifty futures spread (the price difference between the best buyer and the best seller) is now about Rs. It implies that your loss would be Rs. 125 (Rs. 5 X 25 qty) if you bought and sold Bank Nifty right away. The spread will gradually narrow and liquidity will improve as the lot size is decreased, to the trader's ultimate profit.

Conclusion:

The Bank Nifty lot size changes in 2023 is expected to have significant implications for traders, market liquidity, and overall market dynamics. A proactive approach, without falling prey to trading more due to reduced margins, and keeping adept with one’s own devised strategy can help traders capitalize on the opportunities and navigate the evolving landscape of Bank Nifty futures trading.

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