Impact of Bank Nifty Lot Size Change in 2023

Introduction

The National Stock Exchange (NSE) has decreased the market lot size for Nifty Bank Futures and Options to 15 from 25 in an effort to increase customer participation in the derivatives market. The new regulation will take effect with contracts entered into on July 1, 2023.

“Only the far month contract, or contracts that expire in July 2023, will be changed for market lots. The market lots for contracts maturing in April 2023, May 2023, and June 2023 would not change.” NSE stated in a circular. It further added that all following contracts (i.e., the monthly expiry of July 2023 and beyond) will have amended market lots. Other market lots of derivatives contracts on indices, such as Nifty Financial Services, Nifty Midcap Select, and Nifty 50, have been left unaltered by the stock exchange at 40, 75, and 50, respectively.

What are Lot sizes?

Lot size is the number of contracts or shares that can be traded at once. In the context of index futures, lot size determines the quantity of index contracts that can be bought or sold. It is a critical parameter that affects position sizing, risk management, and capital requirements for traders and investors. A smaller lot size provides more flexibility for retail participants with limited capital and allows for finer adjustments to trading strategies.

Reasons for Bank Nifty Lot Size Changes in 2023

According to the Exchange Circular (NSE/FAOP/44482), the value of the contracts in the Futures & Options category may not be less than Rs. 5 lakhs at the time of introduction. For each underlying, the permissible lot size for futures and options contracts shall be the same, or such other lot size as the Exchange may specify from time to time. In its circular, CIR/MRD/DP/14/2015, dated July 13, 2015, SEBI has set forth the revised methodology for revising the lot size for derivative contracts as the lot size for derivative contracts in the equity derivatives segment shall be fixed in such a way that the contract value of the derivative on the day of review is between Rs. 5 lakhs and Rs. 10 lakhs.

Benefits of the Change

1. Enabling traders to handle risk more effectively: The biggest problem is having adequate margin money to trade. Every trader has a limited quantity of capital; thus a losing trade necessitates additional funds in order to alter or hedge positions in order to create a profit. Trading in smaller amounts can reduce a trader's risk and provide them with a cash reserve they can use as a safety net in the event that they need to adjust their deals.

2. Portfolio hedging with less margin required: Lower margin needs due to reduced contract value will benefit small retail traders with portfolios of 6 lakhs or less by allowing them to hedge their portfolios with less margin. This will allow them to safeguard against market volatility and uncertainty.

3. Improved Liquidity: Smaller lot sizes tend to attract higher trading volumes, resulting in improved liquidity in the market. The lot size changes aimed to enhance liquidity and ensure smoother trading for all participants.

Conclusion

It is anticipated that the adjustments to the Bank Nifty lot size in 2023 will have a substantial impact on traders, market liquidity, and overall market dynamics. A proactive attitude, avoiding the temptation to trade more as a result of reduced margins, and maintaining proficiency with one's own established strategy can help traders take advantage of the possibilities and negotiate the shifting trading environment for Bank Nifty futures.

Click here to check the exchange circular.

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