7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 1/10

The National Stock Exchange (NSE) (Hindi: राषीय शयेर बाजार Rashtriya Śhare Bāzaār ) is stock 

exchange located in Mumbai, India. National Stock Exchange (NSE) was established in the mid 1990s as ademutualised electronic exchange. NSE provides a modern, fully automated screen-based trading system,with over two lakh trading terminals, through which investors in every nook and corner of India can trade.

 NSE has played a critical role in reforming the Indian securities market and in bringing unparalleledtransparency, efficiency and market integrity.

 NSE has a market capitalisation of more than US$0.989 trillion and 1,635 companies listed as of July 2013.Though a number of other exchanges exist, NSE and the Bombay Stock Exchange are the two mostsignificant stock exchanges in India, and between them are responsible for the vast majority of sharetransactions. NSE's flagship index, the CNX NIFTY 50, is used extensively by investors in India andaround the world to take exposure to the Indian equities market.

 NSE was started by a clutch of leading Indian financial institutions. It offers trading, clearing andsettlement services in equity, debt and equity derivatives. It is India's largest exchange, globally in cash

market trades, in currency trading and index options. NSE has diversified shareholding. There are manydomestic and global institutions and companies that hold stake in the exchange. Some of the domesticinvestors include LIC, GIC, State Bank of India and IDFC Ltd. Foreign investors include MS Strategic(Mauritius) Limited, Citigroup Strategic Holdings Mauritius Limited, Tiger Global Five Holdings and

 Norwest Venture Partners X FII-Mauritius, who have a stake in NSE. As of June 2013, NSE has 1673VSAT terminals and 2720 leaselines, spread over more than 2000 cities across India.

Origins

The National Stock Exchange of India was set up in 1993, at a time when PV Narasimha Rao was thePrime Minister of India and Dr. Manmohan Singh was the finance minister. It was set up to bring intransparency in the markets. Promoted by leading Financial institutions essentially led by IDBI at the

 behest of the Government of India, it was incorporated in November 1992 as a tax-paying company. InApril 1993, it was recognised as a stock exchange under the Securities Contracts (Regulation) Act, 1956.

 NSE commenced operations in the Wholesale Debt Market (WDM) segment in June 1994. The Capitalmarket (Equities) segment of the NSE commenced operations in November 1994, while operations in theDerivatives segment commenced in June 2000.

How NSE brought a paradigm shift in Financial market

The National Stock Exchange (NSE) changed the way the Indian markets functioned, in the early nineties,

 by replacing floor based trading with nationwide screen based electronic trading, which took trading to thedoorstep of the investor. The exchange was mainly set up to bring in transparency in the markets. Insteadof trading membership being confined to a group of brokers, NSE ensured that anyone who was qualified,experienced and met minimum financial requirements was allowed to trade. In this context, NSE was far ahead of its times, when it separated ownership and management in the exchange under SEBI'ssupervision. The price information which could earlier be accessed only by a handful of people could now

 be seen by a client in a remote location with the same ease. The paper based settlement was replaced byelectronic depository based accounts and settlement of trades was always done on time. One of the mostcritical changes was that a robust risk management system was set in place, so that settlement guaranteescould protect investors against broker defaults.

Markets

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 2/10

Currently, NSE has the following major segments of the capital market:

Equities 

  Equities

  Indices  Mutual Funds  Exchange Traded Funds  Initial Public Offerings  Security Lending and Borrowing Scheme

Derivatives 

  Equity Derivatives (including Global Indices like S&P 500, Dow Jones and FTSE )  Currency Derivatives  Interest Rate Futures

Debt 

  Corporate Bonds

Equity Derivatives 

The National Stock Exchange of India Limited (NSE) commenced trading in derivatives with the launch of index futures on 12th June 2000. The futures and options segment of NSE has made a mark for itself globally. In the Futures and Options segment, trading in CNX Nifty Index, CNX IT index, Bank NiftyIndex, Nifty Midcap 50 index and single stock futures are available. Trading in Mini Nifty Futures &Options and Long term Options on CNX Nifty are also available. The average daily turnover in the F&OSegment of the Exchange on 28th February 2013 stood at Rs 4,02,090.64 crore.

On 29 August 2011, National Stock Exchange launched derivative contracts on the world’s most followed

equity indices, the S&P 500 and the Dow Jones Industrial Average. NSE is the first Indian exchange tolaunch global indices. This is the also the first time in the world that futures contracts on the S&P 500index were introduced and listed on an exchange outside of their home country, USA. The new contractsinclude futures on both the DJIA and the S&P 500, and options on the S&P 500.

On 3 May 2012, the National Stock exchange launched derivative contracts (futures and options) on FTSE

100, the widely tracked index of the UK equity stock market. This was the first of its kind of an index of the UK equity stock market launched in India. FTSE 100 includes 100 largest UK listed blue chipcompanies and has given returns of 17.8 per cent on investment over three years. The index constitutes85.6 per cent of UK’s equity market cap. 

[2] 

On 10 January, 2013, the National Stock Exchange signed a letter of intent with the Japan ExchangeGroup, Inc. (JPX) on preparing for the launch of CNX Nifty Index futures, a representative stock priceindex of India, on the Osaka Securities Exchange Co., Ltd. (OSE), a subsidiary of JPX.  [3] 

Moving forward, both parties will make preparations for the listing of yen-denominated CNX Nifty Indexfutures by March 2014, the integration date of the derivatives markets of OSE and Tokyo Stock Exchange,

Inc. (TSE), a subsidiary of JPX. This is the first time that retail and institutional investors in Japan will beable to take a view on the Indian markets, in addition to current ETFs, in their own currency and in their 

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 3/10

own time zone. Investors will therefore not face any currency risk, because they will not have to invest indollar denominated or rupee denominated contracts.

Currency Derivatives 

In August 2008, currency derivatives were introduced in India with the launch of Currency Futures in USDINR by NSE. It also added currency futures in Euros, Pounds and Yen. The average daily turnover in theF&O Segment of the Exchange on 20th June 2013 stood at Rs 41,926.16 crore in futures and Rs 27,397.70crore in options, respectively.

Interest Rate Futures 

Interest Rate Futures were introduced for the first time in India by NSE on 31 August 2009, exactly oneyear after the launch of Currency Futures. NSE became the first stock exchange to get an approval for interest-rate futures, as recommended by the SEBI-RBI committee.

Debt Market 

On 13th May, 2013, NSE launched India's first dedicated debt platform to provide a liquid and transparenttrading platform or debt related products. [4] 

The Debt segment provides an opportunity to retail investors to invest in corporate bonds on a liquid andtransparent exchange platform. It also helps institutions who are holders of corporate bonds. It is an ideal

 platform to buy and sell at optimum prices and help Corporates to get adequate demand, when they areissuing the bonds.

Trading scheduleTrading on the equities segment takes place on all days of the week (except Saturdays and Sundays andholidays declared by the Exchange in advance). The market timings of the equities segment are:

  (1) Pre-open sessiono  Order entry & modification Open: 09:00 hrs o  Order entry & modification Close: 09:08 hrs

* 

*with random closure in last one minute. Pre-open order matching starts immediately after close of pre-open order entry.

  (2) Regular trading sessiono   Normal/Retail Debt/Limited Physical Market Open: 09:15 hrs o   Normal/Retail Debt/Limited Physical Market Close: 15:30 hrs 

Block deal session is held between 09:15 hrs and 09:50 hrs.

  (3) The Closing Session is held between 15.40 hrs and 16.00 hrs.

The Exchange may however close the market on days other than the above schedule holidays or may open

the market on days originally declared as holidays. The Exchange may also extend, advance or reducetrading hours when it deems fit and necessary.

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 4/10

Exchange Traded Funds on NSE

An (ETF) is an investment fund that is traded on a stock exchange, just like stocks. An ETF holds assetssuch as stocks, commodities or bonds and trades in value, around its (NAV) over the course of the tradingday. Most ETFs track an index such as a stock index or a bond index. ETFs are attractive investments

 because of their low costs, tax efficiency and stock-like features. ETFs are the most popular type of exchange-traded products in the USA and Europe.

Exchange Traded Funds are simple and easy to understand. Most ETFs also have an intrinsically lower risk due to their diversified portfolio. This diversification coupled with low expenses allows the smallest of theinvestors to reap the benefits of market based returns. Retail investors can use ETF’s as an easy entry

vehicle into the capital markets. Equity investments are most likely to give you attractive long term growth.And, this growth is reflected in market indices, like the NSE Nifty.

The following products are trading on CNX Nifty Index in the Indian and international Market:

  7 Asset Management Companies have launched ETFs on CNX Nifty Index which are listed on NSE  15 index funds have been launched on CNX Nifty Index  Unit linked products have been launched on CNX Nifty Index by several insurance companies in

India  World Indices

Derivatives Trading on CNX Nifty Index:

  Futures and Options trading on CNX Nifty Index  Trading in CNX Nifty Index Futures on Singapore Stock Exchange (SGX)

  Trading in CNX Nifty Index Futures on Chicago Mercantile Exchange (CME)

Technology

 NSE’s trading system, is a state of -the-art application. It has an up time record of 99.99% and processesmore than 450 million messages every day with sub millisecond response time. [5] 

The trading system is deployed on a highly scalable architecture where matching engines can be added based on business demand. The current deployed capacity allows the trading system to handle more than100,000 messages per second. [6] 

The exchange has been continuously undertaking capacity enhancement measures to effectively meet therequirements of increased users and associated transaction loads. Today, NSE has 2,00,000 terminalsspread across more than 2000 towns/cities across the country. [7] 

Certifications

The National Stock Exchange (NSE) has taken the initiative of evolving a new academic discipline in the

financial markets. NSE is keen to ensure that the people of India are economically empowered to takesound financial decisions and invest wisely. Therefore, National Stock Exchange has collaborated with

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 5/10

several universities like Gokhale Institute of Politics & Economics (GIPE), Pune, Bharati VidyapeethDeemed University (BVDU), Pune, Guru Gobind Singh Indraprastha University, Delhi, RavenshawUniversity of Cuttack and Punjabi University, Patiala, etc. to offer MBA and BBA courses that impartknowledge on markets and also build the deficit in the financial sector by giving them employable skills.

 NSE has also provided mock market simulation software called NSE Learn to trade (NLT) to develop

investment, trading and portfolio management skills among the students. The simulation software is verysimilar to the software currently being used by the market professionals and helps students to learn how totrade in the markets.

Another aspect on which National Stock Exchange (NSE) has worked with a missionary zeal: educatinginvestors about the opportunities in the market, the precautions they should take and their rights andobligations. In order to economically empower investors and help them take sound financial decisions,

 NSE conducts nearly 1,500 seminars every year in the metros as well as the smallest towns of India.

 NSE also conducts online examination and awards certification, under its programmes of NSE'sCertification in Financial Markets (NCFM). [8] Currently, certifications are available in 46 modules,

covering different sectors of financial and capital markets, both at beginner and advanced levels. The list of various modules can be found at the official site of NSE India. NSE has been offering a short-term coursecalled NSE Certified Capital Market Professional (NCCMP) since August 2009. [9] The NCCMP or NSECertified Capital Market Professional is a 100 hour program for over 3-4 months, conducted at thecolleges, covers theoretical and practical training in subjects related to the capital markets. NCCMP coverssubjects like equity markets, debt markets, derivatives, macro economics, technical analysis andfundamental analysis. Successful candidates are awarded joint certification from NSE and the concernedcollege.

SUMMARY AND CONCLUSION

7.1 SUMMARY AND CONCLUSIONThe financial system is the most important institutional and functional vehiclefor economic transformation of a nation. Finance is a bridge between the present andthe future and whether it is the mobilisation of savings or their efficient, effective andequitable allocation for investment, it is the success with which the financial system

 performs its functions that sets the pace for the achievement of broader nationalobjectives. The financial system is a set of inter-related activities/services workingtogether to achieve some predetermined purpose or goal which includes differentmarkets, the institutions, instruments, services and mechanisms which influence thegeneration of savings, investment capital formation and growth.As economies develop over time, financial systems become increasingly

sophisticated, which calls for greater need of risk management techniques. In the waveof globalization, the external economic factors have an increasing impact on acountry’s economy and the financial security issues are more prominent as well.Innovation of derivatives in this direction have redefined and revolutionized thelandscape of financial system and it has earned a well deserved and extremelysignificant place among all the financial products available till date. The derivativesmarket in a financial system may act as a buffer to the country’s economy. Derivatives trading play an important role in providing the full range of markets necessary for economic efficiency. Derivatives are risk management tool that help in effectivemanagement of risk. It provides an opportunity to transfer risk, from the one who wishto avoid it; to one, who wish to accept it.

The concepts which underpin derivative contracts have been used for centuriesand can be traced back to the Tulip futures market. It was developed in Holland in the

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 6/10

17th century. In the 21st century the global financial markets have undergone dramaticchanges and shocks, as a direct result of the proliferation of derivative instruments.The general acceptance of derivative instruments in the global market place started in202

the mid twentieth century through the introduction of currency futures. Following the

successful introduction of currency futures, innovations had taken place to broaden the products in the derivative segment. There are various derivative contracts available,out of which Futures are standardized contracts traded on liquid markets according towell specified rules and procedures. Thus a futures contract is a legally bindingagreement to buy or sell a specific quantity of the underlying asset at a predetermineddate in the future at a price agreed on today. A stock Index future is one of thesignificant innovations in the financial derivative segment of the 1980s. Index futureshave a variety of attractive features for a trader who wishes to trade a portfolio of shares corresponding to the index. Despite some controversy about index arbitrageand program trading that developed after the October stock market crash in 1987,these contracts is very successful and beneficial to stock portfolio managers.

Institutional investors’ use hedging through trading futures is a process used to control or reduce the risk of adverse price changes. Until 1982, market participants could notcontrol market risk of their portfolios. The introduction of stock index futurescontracts offers them an opportunity to manage the market risk of their portfolioswithout changing the portfolio composition. The objective of hedging is to minimizethe risk of the portfolio for a given level of return. Index futures is favored as ahedging vehicle because of its liquidity, speed, and lower transaction costs, including

 bid-ask spread and brokerage commissions. Stock Index futures not only hedge themovement of index but act as a vehicle in the efficient price discovery also.In this respect the first stock index futures was launched in 1982 when theKansas City Board of Trade introduced futures on the Value Line Index. In thesame year, the Chicago Mercantile Exchange introduced futures contract on the S&P500 Index. The three decade history of stock index futures contracts has been marked

 by great success both in the United States and in many other countries.The spectacular growth in financial derivatives in US and UK has fuelledinterest among emerging countries like India to take the advantage of this innovativeinstrument in their markets. In India the financial derivatives is introduced after L.C.Gupta committee recommendations. Bombay Stock Exchange was the first tointroduce futures on its popular index Sensex on June 9, 2000 and the National Stock Exchange introduced futures contract on its Nifty Index in June 12, 2000. Thereafter other derivative instruments are being introduced in NSE in a phased manner. The

derivative segment of NSE has grown by leaps and bounds not only in terms of volume but in terms of turnover too. In terms of turnover, stock index futures is one of the major instruments in the F&O segment of NSE. The enthusiasm among the tradersin dealing with derivatives has made NSE one of the largest futures exchange in theworld. Thus India has become one of the most successful and vibrant market for exchange-traded derivatives. This reiterates the strengths of the modern developmentof India’s securities markets, which are based on nationwide market access,anonymous safe and secure electronic trading, and a predominantly retail market.Academic research in this area has been motivated by several considerations.First, the utility of these contracts for risk allocation and price discovery depends onthe efficiency with which they are priced relative to the underlying index; Second to

dispel the myth that stock index futures destabilize the underlying cash market byaugmenting volatility, and Finally, to identify the degree of Cointegration and causal

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 7/10

relation between futures and spot prices especially in an emerging market economylike India.It is with this backdrop, the objective of this research work is to examine theempirical relationship between stock index and stock index futures in the context of India’s capital market with special reference to S&P CNX Nifty and Nifty futures  

over the sample period of June 2000 to May 2011.The study used End of the Day (EOD) closing prices of near month futurescontract as well as the daily closing price of the S&P CNX Nifty collected from NSEdata base. Econometric models based on GARCH class models, ADF, PP, Johansen’s Cointegration and VECM have been employed.In India, the emergence of financial derivatives market is relatively a recent

 phenomenon. Since its inception in June 2000, the market has exhibited exponentialgrowth both in terms of volume and number of traded contracts. Within a short spanof ten years, derivatives trading in India has surpassed cash segment in terms of turnover and number of traded contracts. The trading in Index futures has gainedmomentum in India because of its inherent characteristics like: a) index futures are

cash settled; b) these are highly liquid since index futures are exchange traded and theinvestor can offset his position on any day prior to the expiration day; c) the

 performance of all index futures contract are guaranteed by the exchange’s clearing house; d) it carries margin requirements which ensures that the risk is limited to the

 previous day’s price movement on each outstanding position. Though Bombay Stock Exchange and National stock exchange started tradingin index derivatives concurrently, but currently NSE has the dominance in theturnover and growth of India’s index futures market. This can be attributed to the higher impact cost and lower liquidity in trading the BSE Sensex Futures from NSE

 Nifty futures. Thus Nifty future is one of the popular contracts among the traders. Thefutures on NSE’s most popular index Nifty as an underlying called FUTIDX is the first contract in its F&O segment. From the expiration point FUTIDX is of three types,near month, middle month and far month contracts those will expire in one , two andthree months respectively.Stock Index futures are used by investors primarily for short term trading

 purposes, rather than as a relatively long term alternative market basket. Consideringthe largely short term nature of positions in the index futures market, the use of indexfutures contract for allocating risk or as a vehicle for price discovery dependscritically on the efficiency with which these contracts are priced relative to theunderlying cash index. By efficiency it can be inferred that how fast information isreflected in the market price of an asset. The integration of capital markets across the

globe is the important predicator for analyzing the efficiency of the emerging marketslike India after introduction of stock index futures. The testing of efficient markethypothesis on the spot market (NSE) and the index futures market separately,contributes to weak form of inefficiency. Thus in both the markets the past result willnot influence the current price of the securities. On the other hand, a comparativestudy of the efficiency between spot and index futures market reveals that indexfutures market is relatively more efficient than the spot market. Therefore indexfutures market will act as an efficient price discovery vehicle which will certainly helpthe traders to take hedging and arbitrage positions to secure maximum returns atminimum risk exposure. In addition, the contribution of the futures market tominimize the volatility of the cash market is an important implication of the efficient

 price discovery.The trading in stock index futures has attracted its share of criticism that it

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 8/10

increases the volatility of the market as a whole. The evidence as to whether trading inindex futures in NSE has coincided with an increase in market volatility is not verycompelling. Volatility is in fact the manifestation of the arrival of fresh informationinto the market. As new information is received, buyers and sellers will re-assess their 

 perceptions of the values of different securities and the observed prices will then

adjust to reflect these changes and this process of adjustment will give rise tovolatility. This work investigates the issue for a dynamic emerging market, i.e.

 National Stock Exchange of India that allows the examination of changes in the natureof volatility and for asymmetric responses to news. The results exhibit that spot pricevolatility is less affected following the introduction of index futures trading.In an efficient market all available information is instantly converted into

 prices of securities. Prices in the futures and spot market should move simultaneouslywithout any delay. The study of volatility of stock market with the introduction of derivatives is inconclusive if the lead-lag property between spot and index futuresmarket is not studied. The lead-lag relationship between market index and its futurereflects how fast each market reacts to market wide information and how well their 

co-movements are indicated. If one market reacts faster to the market wiseinformation than the other, there will be a lead-lag relationship that is expected to beobserved in data. In the Indian context by observing S&P CNX Nifty and NiftyFutures, it reveals that the Nifty futures lead the underlying index in the long run. Thereason for the above finding may be: a) infrequent trading of stocks comprising theindex; therefore the index reflects "stale" prices and so lags futures, b)differences in liquidity between the stock and futures markets, c) informed tradersmay have a preference to trade in one market and not the other depending onwhether the information is firm specific or systematic and d) due to marketfrictions such as transaction costs, capital requirements and short-sellingrestrictions may make it more optimal to trade in the futures markets.

7.2 MAIN FINDINGSIn accordance with the specific objectives of this research work, the mainfindings are enlisted below:• The concept of stock index futures in India is only a decade old one. In these yearsit has achieved a lot. The spectacular growth and success in index futures is becauseof its liquidity. The liquidity of a contract is related to the cost of trading, the lower cost of trading of index futures leads to higher liquidity and leading to higher market capitalization.• Since one of the pre-condition for competitive price discovery in the spot andfutures market is the validity of the efficient market hypothesis, the research work 

 proceeded in this direction and found that the spot market is showing weak form of inefficiency. Thus next period price will not reflect the previous day’s information. As regards to the futures market, the time series of spot and future prices of S & PCNX NIFTY are integrated of order one and Cointegrated in the long-run. This isthe indication of relative efficiency of India’s Index Futures market. 

• The very objective behind the introduction of stock index futures in India was toreduce the volatility of the underlying stock index. Thus, the research work investigated the nature and causes of spot and index futures market. And, it has

 been found the evidence of high persistence of time varying volatility and itsasymmetric effects. Furthermore, the futures market is showing high level of volatility from that of the spot market. The result also exhibits that bad news have

more role in the volatility in the futures as well as in the spot market.• Since the causal relation between spot and index futures market is essential to

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 9/10

know the price discovery function, this research work investigated the nature anddirection of the lead-lag relation between stock index and index futures market. Ithas been found the evidence of long-run causality running from the index futuresmarket price to spot market price. In other words, the S & P CNX Nifty based207

index futures market tends to lead the underlying stock index (i.e., S & P CNX NIFTY) over a long period of time.

7.3 IMPLICATIONS

• In the index futures market the observation of S&P CNX Nifty futures higher liquidity and also an increase in market capitalization is evident during the lastdecade. The higher liquidity of the Index futures market implies undertaking of large transactions at a low transaction cost. The low transaction costs will implyhigher trading activities in the futures segment leading larger inflow of funds intothe market.• It is found that spot market (NSE Equity market) shows weak form informationalinefficiency. The results imply that futures markets serve their prescribed role of 

improving pricing efficiency and improve the quality of information flowing tospot markets. This will enable investors to prudently structure their strategiesinvesting in both spot and futures markets. Thus, the retail as well as domesticinstitutional traders in India can design their portfolio and can take positions in thefutures market to safeguard themselves from the fluctuations in the cash market. Inaddition, the regulators will in advance come to know regarding the prospective

 price movement in the cash market and when they feel market overreacting to theinformation, they can take appropriate action in the interest of the commoninvestor. Furthermore, it is found that Nifty futures Index is more efficient relativeto its corresponding underlying index. It implies that the available information is

 processed faster in futures market than the spot market. This will pave the way for faster price discovery.• In both the spot and futures market, it has been observed that the prices showinformational asymmetry and greater role of bad news in increasing volatility.Thus, the result imply that when an information is released it will first adjusted inthe prices in the futures market and after that it passes to the spot market leadinglower level of volatility as compared to the index futures market. This effect is

 popularly called as volatility spillover effect. The volatility spillover effect impliesthat investors are advised to predict volatility in the cash market by observing thevolatility in the index futures.• The present study suggested that the index futures return lead the cash market

returns. This finding is significant to determine the nature and location of pricediscovery and to find out which market is most efficient. Further this lead-lagrelationship is significant to arbitrageurs who are required to complete both legs of an index arbitrage transaction within a short span of time. In other words futuresindex leading the spot index suggest that for a short period of time, the prices inthe two markets could be out of line resulting in profitable arbitrage opportunities.So traders can make profit from the discrepancy in the prices of Nifty Futures and

 Nifty Spot, provided they can react quickly. In this context the prior knowledge of Index futures leading the spot Index could likely influence arbitrageurs decision asto which market they should react in first, which leads to the initial trade in theindex futures market. The finding of futures price leading spot price implies that

investors will be able to use futures price as a good indicator in predicting spot price.

7/27/2019 The National Stock Exchange.docx

http://slidepdf.com/reader/full/the-national-stock-exchangedocx 10/10

7.4 SUGGESTIONS

 This research work has observed relatively higher Index futures market liquidity inthe last decade. So it is suggested here to improve the scenario further. Under normal market conditions short selling may be suggested which contributes to

 price efficiency as well as market liquidity.

 The present study observed the informational inefficiency of spot and futuresmarket. In the domain of index future market, policy makers may implementfinancial transaction taxes which will help increasing revenue, reducingdestabilizing speculation and improving the informational efficiency of the market(Matheson, 2011). Further it is suggested to lit away short selling, if any, so as toenhance the informational efficiency of the stock market relative to the indexfutures market. The present study provided the evidence of higher index futures market volatility.In this context the regulatory response may be the introduction of transaction209

taxes, which help reduce noise trading (a significant source of price fluctuation)

and hence decreasing volatility. The causal relationship in the direction futures price to spot price suggests that the

 policy makers should take into consideration the futures market towards the cashmarket when developing a policy for the futures market. Information and Communication technology (ICT) has to be made all pervasive inminimizing information asymmetry in the markets leading to an efficient pricediscovery and investor protection.

7.5 SCOPE FOR FURTHER RESEARCH

The analysis provided in this thesis suggests a number of areas for further research.• In recent years crises hurt many developed and developing nations. During crisesunrestricted short selling contributes to sudden price declines in securities that areunrelated to their true price valuation. In the absence of restrictions on short sellsin derivatives markets, the greater leverage of futures creates a potential for grater speculative selling than would occur in the stock market. This may further worsenthe turbulent environment. Hence further research is required in this direction.• It has been observed that the transaction taxes prevent instant price adjustmentsaccording to new information and cause price jumps and higher volatility (Umlauf,1993). From the investors’ perspective transaction taxes are also unwelcomed as it is expected to adversely affect the volume of trade. Thus in their effort to reducevolatility using taxes as a tool, regulators may end up creating more problems

without necessarily resolving the original one. Hence it necessitates further research.• Since market volatility is inevitable in emerging market economies like India it isnot sufficient to investigate the lead lag relation between spot and future prices it ishighly essential to examine the lead lag relationship in daily returns and volatilities

 between price movements of stock index futures and the underlying cash index.