Why NSE Revised Lot Size Of Nifty 50 Contracts | Profit Explains
NDTV Profit breaks down the reason behind the NSE's decision to reduce lot size and how it will impact investors.
The National Stock Exchange has reduced the market lot of derivative contracts on select indices, including the benchmark Nifty 50, as part of its periodic review.
The lot for the Nifty 50 has been cut to 25 from 50. For Nifty Financial Services, it has been pared down to 25 from 40 and for the Nifty Midcap Select, it has been slashed to 50 from 75. The market lot of the Nifty Bank remains unchanged at 15.
NDTV Profit breaks down the reason behind the NSE's decision to reduce lot size and how it will impact investors.
What's Market Lot Size?
Market lots represent the number of units of a financial instrument that have been bought on an exchange.
For example, if the market price of a ticker is Rs 100 apiece, which has a market lot size of 20, then the investor will have to at least have Rs 2,000 (apiece value * lot size) to buy one lot.
When Do Changes Come Into Effect?
The changes are part of a periodic review of lot sizes in derivatives contracts and will come into effect from April 26. All new contracts generated from the end of the day of April 25 and available for trading from April 26 will be with the revised market lot size.
For the Nifty 50 index derivatives, all contracts — weekly, monthly, quarterly and half-yearly expires — available for trading from the trade date of April 26 will be with the revised market lot size.
For the Nifty Financial Services, the first monthly expiry contract to have revised market lot will be July 2024 expiry, expiring on July 30.
For the Nifty Midcap Services, the first monthly expiry contract to have revised market lot will be July 2024 expiry, expiring on July 29.
Why The Change?
The exchanges need to review the lot size once every six months based on the needed adjustments.
According to the Securities and Exchange Board of India's rules, lot size for derivatives contracts shall be fixed within Rs 5–10 lakh. Currently, the notional value of the Nifty 50 is approximately over Rs 11 lakh as the index has seen a huge run-up recently.
Implications On Markets
This will be a major boost to retail participants as it becomes an attractive size to enter trades in the derivatives segment. Apart from leading to increased liquidity, this will also help traders to finely manage risks.
How Will Brokerages React?
The aspect to watch out for is how the brokerages will react to the move.
Currently, on an average, a contract in options is Rs 20 per lot size. If the brokers do not reduce their brokerage overall, instead of paying Rs 20 for 50 lot size contracts, investors must still pay Rs 20 for 25-lot-size contracts.
Who Stands To Benefit?
Exchanges, brokerage firms will be able to benefit from this move.
Benefit for institutions and retail participants will depend on brokerages.
Will have implications on retail participation and will reduce writing at far out-of-the-money options.
To Check On Competition
The decision to reduce the contract size could also be attributed to keeping its competition in check.
Post the change, the average Nifty contract size will be at about Rs 5.5 lakh for a lot size of 25 vs Sensex at about Rs 7.3 lakh for a 10-lot size.
