Cash volumes fall in May as market volatility keeps away investors

Regulatory changes and curbs on intraday leverage hurt volumes and push change to the derivative options segment.

Cash volumes dropped 16 per cent month-on-month in May as a sharp spike in volatility weighed on investor participation. The combined average daily turnover (ADTV) in the equity cash segment of the NSE and BSE stood at Rs 61,710 crore, compared with Rs 73,245 crore in April. The ADTV for May was the lowest since December.

Experts said wild swings in stock prices seen last month deterred investors from mounting aggressive bets in the market.

“Volumes increase in a bull market, and when markets become volatile, the participation of retail investors reduces. Because we had most of the stocks coming down from their 52-week highs, [there was] a reduction in volume on the retail side. Retail investors, unlike HNIs (high networth individuals), do not tend to sell at a loss and buy back again. That’s the reason trading reduces when volatility increases,” said Prasanth Prabhakaran, managing director and chief executive officer at YES Securities.

The benchmark Nifty swung over 8 per cent in May, ending the month with a 3 per cent loss. The Nifty Midcap 100 index swung 12 per cent and ended the month with a 5.3 per cent decline, while the Nifty Smallcap 100 gyrated an even sharper 18 per cent and finished with a 10.2 per cent loss in May.

“Retail investors trading in mid-caps and small value stocks have gone down significantly. There is no great possibility of cash volumes going significantly higher. Turnover goes up only when speculation is higher. If that is not going to happen, then cash markets will not return to their previous levels. If the markets rise again, we might see some improvement. But I don’t see cash markets doubling from here the way derivative markets have,” said Prakarsh Gagdani, CEO, 5Paisa Capital.

While cash market volumes are down over 30 per cent from last year’s peak, volumes in the derivatives segment remained close to the peak in May. The ADTV for the derivatives segment stood at Rs 104.1 trillion in the month, down marginally from Rs 104.5 trillion in April.

“In the last two years, after the new margin norms were implemented, the speculative volume in the cash market has gone away. Maybe a lot of it has shifted to derivatives. That’s why the derivative volumes have more than do­ubled, and cash market volumes have gone down,” said Gagdani.

Industry players said regulatory changes such as upfront cash margins and curbs on intraday leverage have hurt cash market volumes and pushed investors towards the derivative options segment.

Besides volatility and regulatory changes, the pace of growth in new demat account opening has been moderating this year, amid the correction in the market. In April, only 2.4 million new accounts were added, as against 3.4 million in January. The data for May has not yet been released, however, but there could be a spurt because of the Life Insur­ance Corporation of India’s (LIC’s) mega initial public offering (IPO).

“The number of new trading accounts that are getting opened has diminished because of the volatility. The new investors coming to the market have reduced to some extent. Moreover, this year is likely to be very volatile because there are at least a few more hikes expected by the US Federal Reser­ve, and it will have a domino effect in India. As long as this volatility continues, the trading pattern will reduce for all retail customers,” said Prabhakaran.