Speculators reign on the National Stock Exchange's futures and options segment. The evidence is compelling: institutional investors account for less than 2 per cent of the trading volumes in the NSE's derivatives segment.

The rest is contributed by arbitrageurs and day traders, clubbed in the exchange's data as "non-institutional investors." Indeed, the speculative content of the derivatives market has driven the NSE to become the 11th largest market in the world.

The speculators' favourite roulette table: futures on individual stocks. Of the average volumes of Rs 8,000-10,000 crore (Rs 80-100 billion), stock futures dominate with 63.54 per cent of the traded volumes, while futures on the Nifty account for another 24.50 per cent. Thus, futures trading alone accounted for 88 per cent of the trading in October 2003, NSE data show.

Interestingly, 80-85 per cent of the turnover is generated by high net worth investors and arbitrageurs, who trade on both sides of the market to generate higher returns. The broking fraternity prefers to put it delicately as "view-based trading".

SSKI, Kotak Securities, Refco Securities and Daulat Capital are among the top institutional brokerages. According to the NSE's Derivatives Update for October 2003, the top five members contributed 18 per cent of the total trading in the options segment and 14 per cent in the futures sub-segment.

Though no firm numbers are available, they vary with brokerages. SSKI, which is among the top five brokerages in this segment, caters to retail investors, while Kotak Securities caters to institutions, retail investors as well as a private client group comprising high net worth customers.

Navneet Bansal, associate vice-president (Derivatives) at Kotak Securities said, "Most of the day traders in the cash segment have moved into the derivatives segment in a big way." Ashok Mittal, who heads derivatives at SSKI, added, "It is the reverse in the derivatives market. Retailers are creating the market for institutions."

A secular stock trend in the last six months is getting traders higher returns in the derivatives market at a smaller outlay than in the cash market. The net gain from the arbitrage business, playing for differences between the cash and derivatives markets, is estimated at 8-9 per cent.

Bansal said: "The return on arbitrage is around 12 per cent. On most occasions, the returns are higher in the beginning of the month, but as the cost of carry (finance cost) declines towards the month-end, the returns fall."

Mukul Pal, a derivatives analyst at Edelweiss Capital, added: "A bit of arbitrage is good as it creates volumes and develops the market."

Bansal said: "The madness in the market is likely to continue till the cost of carry comes down to realistic levels. Also, this secular trend in the market will continue till people start using derivatives for hedging their positions rather than speculating on price movements. But day traders are unlikely to change.