The capital market regulator SEBI has increased the open interest position limit for a broker (Trading Member) by 15 times. Earlier the limit was Rs 500 crore or 15 percent of the market wide open interest, whichever was higher. It has now been increased to Rs. 7500 Crore or 15 percent of the market wide total open interest, whichever is higher. This is 15 times increase in open interest position limit. Multifold increase in open interest has wide repercussions. Let us discuss in detail.
The importance of open interest: Open interest is defined as the total number of contracts open at an option strike price or a future contract at specified time. Higher the open interest, higher the liquidity at a strike price. Lower the open interest means lower the liquidity and higher chances of price manipulation. Increase in price with increase in open interest implies bullish sentiment. Decrease in price with increase in open interest means bearish sentiment. Decrease in open interest with increase in price means short covering. Increase in open interest with decrease in price means bearish sentiment or creation of short position. You must have got the idea that open interest and price analysis are important to analyze mood of the market. Therefore, timely intervention of regulatory bodies in open interest space is a must to ensure market integrity.
Open interest manipulation: Open interest and price are two vital indicators to analyze market trend at a given point of time. If you are able to manipulate just one coordinate either price or open interest, you are able to fool the unsuspecting retail investor. The instruments to manipulate prices are trivial – media publicity, planting a news, impressing technical analysts, fake order book, window dressing of balance sheet, hiring operators to run the show etc. Open interest manipulation is technical game. It’s prone to manipulation because of its fast-changing nature. The stock market regulator has confessed its inability in keeping a tab over open interest on real time basis. If you go through the SEBI Circular dated 1st October 2024, the capital market regulator has shied away from real time analysis of open interest violation. The same sentiment has been echoed in the SEBI Circular dated 15th October, 2024:
‘It is also noted that open interest of both the participants and the market is dynamic and changing throughout the day. With a view of providing better clarity to the market participants in terms of their position limits, the following has been decided:
3.1. In conformity with the extant practice in currency derivatives segment, positions of market participants in the equity derivatives segment (index and stocks) shall also be monitored based on total open interest of the market at the end of previous day’s trade.
3.2. In case of a drop in market OI compared to the previous day’s market OI, market participants may breach the specified position limits even if their positions have remained unchanged throughout the day.
3.3. For such cases of passive breaches, market participants would not be penalized and not be required to unwind their positions.’
SEBI’s generosity in forgiving open interest violators speaks of its technical incapability in monitoring open interest at real time basis.
The repercussions of increase in open interest limit: With implementation of new F&O rules from 20th November 2024, most of the F&O trades are going to concentrate into hands of few chosen broking giants. With the rule of 500 crore or 15 percent, the concentration would have become a bit difficult. To facilitate concentration of open interest volume into hands of selected broking giants in upcoming F&O regime, it had become necessary to modify Para 1.3.2.3 and para 2.3.2.3 of Chapter 5 of the Master Circular on Stock Exchanges and Clearing Corporations (SECC), dated October 16, 2023. The concentration of open interest volume into hands of a dozen trading members would mean easy manipulation of demand-supply scenario in F&O space. It would further pave way for misleading open interest number through unreasonable orders at certain price, algo based price jammers and open interest jackers.
In my view, 15 times increase in open interest position limit may sound logical due to multifold appreciation in Index/stock price over the years, but revision in open interest limit is prone to manipulation and concentration of open interest in few chosen hands. SEBI must put systems in place to save retail investors from open interest manipulators and price riggers.
