The National Stock Exchange (NSE), which is the leading stock exchange in India, is experiencing increasing competition from its rival, the Bombay Stock Exchange (BSE). In response to this competition and evolving market dynamics, NSE has taken a significant step by reducing the lot size of Nifty Futures and Options contracts to 25 shares, effective from April 26, 2024. This reduction applies to contracts expiring weekly, monthly, quarterly, and half-yearly.
This decision is intended to make NSE’s contracts much more affordable compared to the Sensex options contracts offered by BSE.
NSE has also adjusted the lot size of its Nifty Financial Services (Finnifty) derivatives contracts to 25 from 40 across various maturities, and for Nifty Midcap Select to 50 from 75 across varying maturities.
The Sensex contracts gained momentum starting from May last year. But now, with the lot size halved by NSE, its contracts have become comparatively cheaper. This strategic move by NSE aims to maintain its competitiveness in the market, especially against the rising popularity of BSE’s contracts.
What is the market lot size?
The market lot size refers to the standardized quantity of shares or contracts that are traded in a single transaction on a stock exchange. It represents the minimum number of shares or contracts that can be bought or sold at once.
Market lot sizes are determined by stock exchanges and may vary from one security to another. These lot sizes are established to maintain liquidity, facilitate orderly trading, and ensure efficiency in the market.
For example: in the context of futures and options trading, the market lot size determines the minimum number of contracts that can be traded in a single transaction.
Also Read: Why Sensex, small and mid cap stocks fell today: 5 reasons
Why change lot size now?
This change comes as the NSE faces increasing competition from the BSE. BSE had gained traction with its Sensex options contracts, which were relatively cheaper compared to NSE’s offerings.
With the reduced lot size, the value of NSE’s Nifty contracts has also decreased. For example, at the average closing price of the Nifty index in March, the contract value for NSE’s Nifty contracts is now Rs 5.5 lakh, whereas BSE’s Sensex contracts have a value of Rs 7.3 lakh.
While NSE still holds the majority of the market share, BSE has seen significant growth in its derivatives trading, especially after changing the expiry day of its weekly options contracts. This move by NSE may be an attempt to maintain its dominance in the face of BSE’s increasing popularity in derivatives trading.
Math logic behind NSE’s decision –
In a circular released on Tuesday (April 2, 2024), the NSE said for calculating the contract value, it has considered the average closing price of the underlying index for March 2024.
Last month, the average closing price of Nifty index was 22,187.31, while that of the Sensex was 73,180.67. Based on these figures, at a lot size of 50, the value of a Nifty contract comes out to Rs 11.09 lakh. With the lot size reduced to 25, the value decreases to Rs 5.5 lakh. Comparatively, at the average Sensex closing price, the contract value (for 10 shares) amounts to Rs 7.3 lakh.
Over the past year, BSE’s stock price has surged by 513%, reaching Rs 2,756, fueled by the sharp rise in derivatives volumes.
Who else will benefit?
Exchanges and Brokerage firms. Institutions and individual investors will hinge on the services provided by brokerage firms. It will impact how much individual investors take part and reduce the selling of options that are unlikely to be profitable.
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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered investment advisor before investing in any scheme.
