The NSE recently reduced the lot size of the Bank Nifty futures contract, impacting traders and investors. This post provides an overview of the changes, the reasons behind them, and the potential impact on trading. Learn how to adjust your trading strategy to accommodate the new lot size, and stay up-to-date on the latest developments in the Indian stock market.
The National Stock Exchange (NSE) has reduced the lot size of Bank nifty futures and options contracts in a recent announcement. In pursuance of SEBI guidelines the lot size of all existing Bank nifty long term option contracts (having expiry greater than 3 months) shall be revised from 25 to 15 after expiry of June, 2023 contracts (i.e. 30th June, 2023). The announcement got mixed reactions from the traders and investors in the market.
Although it is a periodic change, the change will make the derivatives market more easily accessible to retail traders. As the lot size is small so the required capital will be low. It will attract retailers to trade bank nifty (in large numbers).
However this change has created a lot of different opinions among the traders regarding its effects on volatility and liquidity. Some think the volatility will increase with the increase of liquidity as more traders will participate due to small lot sizes.
Some traders think just in the opposite way.
What is Bank Nifty? How does it function?
As nifty is an index of top 50 companies listed on the NSE, similarly Bank nifty is also an index comprises of 12 banking stocks such as Axis Bank, ICICI Bank, HDFC Bank, State bank of India, Kotak Mahindra Bank Ltd. This Bank Nifty index is calculated on the basis of the market capitalization of its 12 ingredients.
Traders can initiate trade on Bank Nifty through futures and options contracts. In futures contracts traders are allowed to buy and sell Bank Nifty at a predetermined price on future dates, on the other hand options contracts give traders the right but not the obligation in buying or selling Bank Nifty at a predetermined price on future dates.
What will be the impacts on Traders and Investors?
Bank Nifty futures and options contracts with reduced lot size will have both positive and negative impacts on traders and investors. Due to reduced lot size the required capital to trade in Bank Nifty futures and options contracts will be reduced. As a result, the retail investors will be able to take part in the market with low capital, which could be win win situation for them in the long run. Traders who are trading Bank Nifty futures and options with high position size, they now can tend to make larger position with less capital. This may lead to more gains in the short term. On the other hand due to increased trading volume the volatility may increase that also carry a higher risk.
What will be the probable effects for the market with reduced lot size of Bank Nifty?
There are several impacts we may see due to reduction of lot size of Bank Nifty;
- Firstly, we may see that due to reduced lot size trading in Bank Nifty will be more attractive and easy accessible to the retail investors. The small lot size (new lot size is 15) will require less capital to initiate trade in Bank Nifty futures and options contracts, helping the retailers to take part in the market easily.
- The reduced lot size may increase the liquidity in the market attracting more retail investors and traders to participate in the market. With the increase of traders and investors in the market there may be noticeable increase of buyers and sellers, which will make easy to enter and exit trades randomly.
- Reduced lot size can add higher volumes in Bank Nifty futures and options contracts. With a small lot size deploying less capital the traders and retail investors will be intensified to create larger positions that will increase the trading volumes in the market.
- Some people have the opinion that the reduced lot size may also increase volatility in the market. As there are more traders in the markets the quantity of trades will increase consequently. As a result with the rising volume the volatility also will increase.
Conclusion: The decision of NSE in cutting the lot size from 25 to 15 is a significant move in derivative market. As it will intensify the willingness of the traders and retail investors to participate in the market as there is less capital requirement to initiate trades in Bank Nifty futures and options. Thus the volume will automatically increase as well as the volatility in the market. At the same time the traders and retail investors should be cautious in building their positions keeping risk factor in their minds.
