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India's stock exchanges continue to benefit from strong operating leverage and expanding revenue streams, although recent margin funding regulations could weigh on proprietary trading volumes with average daily turnover (ADTO) in options expected to decline by up to 20 per cent in FY28, according to Dolat Capital.
According to the report, the exchanges have recorded strong profitability growth over the past few years, mainly driven by a sharp rise in index options trading volumes. Additionally, the exchanges have benefited from strong operating leverage while diversifying revenue streams through businesses such as colocation, clearing services and mutual fund transactions. However, the Reserve Bank of India's (RBI) recent regulations restricting leverage through bank guarantees (BGs) could dampen proprietary trading activity. It added that the alternative funding route through commercial papers (CPs) is significantly more expensive--around 11 per cent compared with about 1 per cent for BGs--making such trading strategies less viable and potentially reducing participation from proprietary traders. "We expect a decline in volumes from our base case estimates across exchanges based on the proprietary book contribution and the exposure to bank guarantees," it said in its report. It noted proprietary traders, including high-frequency trading (HFT) firms, account for over 45 per cent of trading volumes in NSE's index options, which contribute about 53 per cent of the exchange's revenue, and around 28 per cent of stock futures volumes. Factoring in the impact of the new regulations, Dolat Capital expects average daily turnover (ADTO) in options to decline by 8 per cent in FY27 and 18 per cent in FY28, while futures volumes could fall by 3 per cent and 6 per cent, respectively. "We are building in 8%/18% decline in ADTO's from our base case ADTO estimates for options and 3%/6% for futures, for FY27E/FY28E," it noted. The report said proprietary traders, including high-frequency trading (HFT) firms, account for more than 50 per cent of BSE's index options trading volumes, which contribute around 60 per cent of the exchange's revenue. "We are building in a 10%/20% decline in ADTO's from our base case ADTO estimates for index options for FY27E/FY28E," it said. (ANI)
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