Sebi can do more to dissuade retail speculation in futures and options

While individuals made losses in F&O, the foreign portfolio investors (FPIs) and proprietary traders earned about ₹28,000 crore and ₹33,000 crore, respectively, in FY24. Against this, individuals and others incurred a loss of more than ₹61,000 crore in FY24 (before accounting for transaction costs).

The proportion of young people (under 30 years old) trading in F&O has increased significantly from 31% in FY23 to 43% in FY24. Nearly 93% of these young traders incurred losses in F&O in FY24, higher than the average loss-makers of 91.1% that year. Among these, low-income traders (those earning less than ₹5 lakh a year) accounted for 76% of F&O traders in FY24 and had the highest percentage of loss-makers.

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In short, while institutional traders (FPIs and proprietary traders) generated profits, a vast majority of individual traders suffered losses, particularly those engaging in high-turnover activities or with limited income and trading experience. Despite the high losses, a majority of traders continued participating in the F&O market.

Investor protection is one of the prime mandates of Sebi, and the findings above caused it to take several measures to curb speculation in F&O by retail participants. The key measures were:

Curb on weekly options contracts: Sebi limited the number of weekly expiry options contracts to one per exchange.

Increase in derivatives contract size: From 20 November, the minimum contract size of various derivative contracts (indices/individual securities) will be increased from ₹5 lakh to ₹15 lakh. This will increase the cost of speculation and may create resistance for unnecessary speculation via retail participation.

Upfront collection of options premium: Sebi mandated collection of upfront options premiums from option buyers by the trading member (TM). This will help in reducing Intraday volatility as a few TMs were allowing clients to take positions in intraday options without collecting the upfront premium.

What more can Sebi do?

However, more can be done to dissuade retail speculation in the equity F&O segment. For one, investors must be educated about F&O as a hedging instrument and not an investment in itself. Sebi, market infrastructure institutions and various investor and industry associations should run campaigns to make investors aware of the perils of F&O trading.

Minimum portfolio size: Sebi could mandate a minimum equity portfolio of say ₹10-15 lakh for individual Investors who wish to trade F&O to ensure they have a fair idea of how investing works and don’t treat F&O as as a betting tool.

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Take a leaf out of RBI’s book: To curb speculation in the currency market through currency derivatives, the RBI has said that currency derivative contracts involving INR – both over-the-counter (OTC) and exchange traded – are permitted only for the purpose of hedging exposure to foreign exchange rate risks. This caused the number of currency option contracts to drop from ₹1,54,188 crore in April 2024 to ₹1,870 crores in August 2024. Similarly, Sebi could also allow individuals to participate in the F&O market only if they have certain underlying exposure to securities.

Change of weekly expiry dates: Generally, the weekly expiry contract begins on Friday and expires the following Thursday. Though trading takes place only for five days, many big instuitional players write option contracts just to benefit from the theta decay of the option value on Saturday/Sunday. Theta decay, also called time decay, refers to the decrease in value of an options contract as it nears its expiration date. The exchanges may be advised to issue weekly contracts only from Monday to Friday.

The authors work with the National Institute of Securities Markets. Views are personal.

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