NSE Lowers Tick Size: Boosting Market Efficiency and Attracting Retail Investors

NSE Lowers Tick Size to Enhance Market Efficiency and Attract Retail Investors: The National Stock Exchange (NSE) of India has implemented a significant change aimed at improving market efficiency and price discovery. By reducing the tick size for securities in the cash and stock futures segments, the NSE aims to make trading more appealing, particularly for retail investors and traders. This move follows a similar adjustment by the Bombay Stock Exchange (BSE) and is expected to have far-reaching impacts on trading dynamics and market behavior.

Understanding the New Tick Size for NSE Securities

Reduction in Tick Size for Cash and Stock Futures Segments

The National Stock Exchange (NSE) of India has implemented a significant change aimed at improving market efficiency and price discovery. By reducing the tick size for securities in the cash and stock futures segments, the NSE aims to make trading more appealing, particularly for retail investors and traders. This move follows a similar adjustment by the Bombay Stock Exchange (BSE) and is expected to have far-reaching impacts on trading dynamics and market behavior.

Impact of 1 Paisa Tick Size on Market Dynamics

Tick size refers to the smallest possible price movement between different bids and offers on the trading platform. Previously set at 5 paise for securities priced below ₹250 in the cash segment, the NSE has now reduced this to 1 paisa. This change is anticipated to bring several benefits to the market, including tighter bid-ask spreads and improved price discovery.

Benefits of Reducing Tick Size for Retail Investors

Enhanced Price Discovery and Market Efficiency

A tighter bid-ask spread leads to better price discovery, making the market more efficient. “The lower tick size will lead to tighter bid-ask spreads, which will enhance price discovery and market efficiency,” said a broking official. This improvement is crucial for maintaining a robust trading environment and providing more accurate market pricing.

Increased Liquidity and Trading Volume

The reduction in tick size is likely to increase liquidity as traders and investors can enter and exit positions more easily. This change is expected to attract more retail investors, who will benefit from the enhanced trading conditions. Increased liquidity also contributes to a more dynamic and responsive market.

Development of New Trading Strategies

With the smaller tick size, investors can develop new trading strategies, particularly in lower-priced securities. The increased granularity in price movements allows for more precise trading tactics. This flexibility can lead to innovative approaches and potentially higher returns for savvy traders.

Comparative Analysis with BSE’s Tick Size Reduction

BSE’s Experience with Reduced Tick Size

The BSE had implemented a similar reduction in tick size to 1 paisa for stocks priced below ₹100 in the cash segment last year. This adjustment was well-received and contributed to increased trading activity and liquidity. By observing BSE’s positive outcomes, the NSE is optimistic about the benefits of this change.

NSE’s Market Share and Expected Benefits

The NSE, which currently enjoys a dominant 93% share in the cash segment, hopes to further cement its position with this latest change. As of April, the average daily turnover on the NSE in the cash segment was ₹1.06 lakh crore, significantly higher than BSE’s ₹7,638 crore. The reduced tick size is expected to boost these figures by making trading more efficient and attractive.

Challenges and Considerations of Tick Size Reduction

Increased System Load

One potential downside of the reduced tick size is the increased load on trading systems. As more orders are placed due to the finer price movements, the systems handling these transactions will experience higher volumes of data to process. “The load on the systems will increase as more orders get pumped in,” noted a broking official.

Marginal Impact on Volumes

While the reduced tick size will likely boost trading volumes, it is not expected to be a revolutionary change overnight. “Lower tick size will reduce the spread and help prop up volumes to some extent. But it will not be a game-changer, overnight,” said Kranthi Bathini, Director of Equity Strategy at WealthMills Securities.

Implementation and Review of New Tick Size

Applicability Across Settlement Cycles

The tick size determined for securities in the T+1 settlement will also apply to the T+0 settlement. This ensures consistency across different settlement cycles and simplifies trading for participants.

Monthly Review of Tick Size

The NSE will review the tick size of each security every month. The closing price on the last trading day of the month in the cash segment will be used to determine the tick size for the following month. This dynamic approach allows for adjustments based on market conditions, ensuring that the tick size remains relevant and effective.

Alignment with Price Bands and Computations

All price-related computations, such as closing price, base price, common equilibrium price, and settlement price, will be aligned with the applicable tick size. The price band mechanism will continue to apply as per the current method, ensuring a seamless transition and maintaining market stability.

Recent NSE Changes and Future Outlook

Reduction in Transaction Charges

In March, the NSE reduced transaction charges on trades in both the cash and derivatives segments by 1%. This reduction is part of the broader strategy to make trading more cost-effective and attractive for participants, further enhancing market activity.

Market Lot Size Adjustment

Last month, the NSE also reduced the market lot size of derivative contracts on select indices, including Nifty 50. This change aims to lower entry barriers for traders and increase participation in the derivatives market, complementing the tick size reduction.

Enhancing Market Efficiency and Attracting Retail Investors

The NSE’s decision to lower the tick size for securities in the cash and stock futures segments is a strategic move designed to enhance market efficiency, price discovery, and liquidity. While it presents some challenges, the overall impact is expected to be positive, particularly for retail investors. By continually reviewing and adjusting tick sizes and transaction charges, the NSE aims to maintain its dominance and ensure a vibrant, efficient trading environment.

Frequently Asked Questions (FAQ)

What is the new tick size for securities priced below ₹250 on the NSE?

The new tick size for securities priced below ₹250 in the cash segment on the NSE is 1 paisa.

How does the reduction in tick size benefit retail investors?

The reduction in tick size leads to tighter bid-ask spreads, enhancing price discovery and market efficiency, which in turn makes trading more attractive and beneficial for retail investors.

Will there be any change in the tick size for stock options?

No, there will be no change in the tick size for stock options. The tick size reduction applies only to the cash and stock futures segments.

How often will the tick size be reviewed?

The tick size for each security will be reviewed monthly. The closing price on the last trading day of the month will determine the tick size for the following month.

What impact is expected from the lower tick size on trading volumes?

While the lower tick size is expected to increase trading volumes and liquidity, it is not anticipated to be a revolutionary change overnight. It will gradually enhance market participation and efficiency.

For more information on NSE’s trading policies and recent updates, visit the National Stock Exchange of India.

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