NSE Derivatives Expiry Day Tweak Leaves Algos Scrambling, BSE Tumbling — Profit Explains

Traders in India's $4.48 trillion equity market faced another speed bump with the biggest bourse shifting its expiry day for its derivatives contracts, prompting debate on its impact on algo traders and its competitors.

National Stock Exchange of India has shifted the monthly and quarterly expiry days of key futures and options contracts to the last Monday of the expiry month. NSE has also shifted the expiry days of Nifty weekly contracts to Monday from Thursday.

This shift is being seen as a sign to strengthen the IPO bound-NSE's position in the derivatives segment, that took a hit after the market regulator's curbs. Bombay Stock Exchange's stock took a 9.4% hit when the markets opened for trade, as investors expect the oldest bourse to lose from this move.

At a time when investors are battling the ongoing correction, algo traders are also poised to take a hit as their decades-old backtest data will become redundant.

The NSE shifted the monthly and quarterly expiry days of futures and options contracts of Nifty, Bank Nifty, FinNifty, Nifty Midcap Select, and Nifty Next 50 to the last Monday of expiry month, according to a circular issued on Tuesday.

Currently, the F&O expiry day falls on the last Thursday of the expiry month.

NSE has also shifted the expiry days of Nifty weekly contracts to Monday from Thursday. In addition, the exchange has also moved the expiry days of Nifty half-yearly contracts to Monday from Thursday.

The changes will come into effect from April 4, NSE stated in the circular.

BSE Ltd., in November last year, revised the expiration days for the Sensex, Bankex, and Sensex 50 derivative contracts, effective Jan. 1, 2025.

The weekly Sensex derivative contract will now expire on Tuesday of each week, replacing the current schedule of Friday. The monthly contract for the benchmark index will follow the same change.

Additionally, for quarterly and semi-annual contracts of Sensex, the expiration date will move to the last Tuesday of the expiration month, rather than Friday.

This will be the first time that derivative contracts will expire on Monday instead of Thursday, throwing decades worth of back-tested data for algo traders into the bin. A lot of traders — algo traders particularly — will have to go back to the drawing board and recalibrate their systems.

An algorithm on Monday will be very different from other days depending on the expiration. When the Sensex expiry was changed, a lot of algo traders had a "tough" time without the back-tested data, according to Chandan Taparia, head of technical and derivatives research at Motilal Oswal Financial Services Ltd. "Market dynamics will change," he said.

The risk that traders will have to take to carry forward their position over the weekend will be a key deciding factor henceforth, as the one-day-before expiry will now be Friday for NSE derivatives.

Further, traders will also have to borrow for a longer period instead of borrowing on Wednesday and squaring off on Thursday.

Thursday's expiry was good compared to Monday, as traders used to get time with the view to avoid the weekend risk, Taparia said. "If the expiry happens on Monday, we need to open and exit on the same day instead of taking the weekend risk."

Earlier, traders had about two to three days between two key expiries: Sensex and Nifty. If they come too close to each other, BSE will stand to lose in terms of the premium that it garners given the traction it gets one day before expiration.

If Nifty contracts expire on Monday, it means a lot of the interest will focus on that particular expiration with its rival not getting enough traction on one day before expiry, potentially hurting its topline.