Mumbai: The exuberance in derivatives trading is finally showing signs of waning after several warnings and a phased crackdown by India’s markets regulator.
Trading in equity index options moderated in September, just before the Securities and Exchange Board of India on 1 October finalised proposals to curb frenzied trading by individual or retail investors. The regulator found that nine out of 10 individual traders lost money in the stock market’s derivatives, or futures and options (F&O), segment in 2023-24—but retail investors remained undeterred, until now.
Index options registered a 3% drop in average trade size to ₹4,925 in September from ₹5,079 in August, although the average trade size in the equity cash market inched up 1.6% month-on-month to ₹30,156 in September, NSE data show.
Stock options witnessed trade size declining by a marginal 0.2% sequentially to ₹14,703 in September.
Because of the decline in index options, the overall trade size of equity options declined by 1.8% to ₹5,403 in September from ₹5,502 in August. Options premium turnover, not notional turnover, has been considered for calculating the average trade size.
Market constituents attributed the decline in options trade size to Sebi’s moves to curb the frenzied trading by individuals. Sebi found that in 2023-24 alone, individual traders with annual income under ₹5 lakh made a net loss of ₹42,790 crore in trading on futures and options.
“The trade size is a function of sentiment,” said Dhiraj Sachdev, chief investment officer at Roha Venture, a family office fund. “The Sebi crackdown after its findings showed huge losses for retail in options trading probably hurt sentiment, leading to a decline in trade size.”
Sebi’s guard rails
Towards the end of July, Sebi released a consultation paper inviting suggestions to strengthen the derivatives framework to enhance investor protection. The regulator finalised six proposals on 1 October. A Sebi panel chaired by G. Padmanabhan, a former executive director of the Reserve Bank of India, had proposed seven measures to curb the retail frenzy in options trading.
Of the six proposals that were accepted, the ones expected to be the most impactful—the increase in contract lot size value to ₹15-20 lakh from ₹5-10 lakh; the reduction in weekly expiries per exchange from five to one; and the increase in the extreme loss margin on options expiry day—will kick in from 20 November.
The other three measures include upfront collection of option premia from buyers and removal of calendar spread benefit on expiry day from 1 February, and intra-day monitoring of position limits from 1 April.
“I suppose the raising of entry barriers is one reason (for the moderation in equity index options trading), and experiencing continued losses might be the other for fewer people having traded,” said S.K. Joshi, executive director, Khambatta Securities Ltd.
Also read | Sebi’s regulatory revisions: Burden for some but relief for most
An annual comparison of trade size based on NSE data yields interesting results.
In the capital market segment, the average trade size in the first half of 2024-25 (1 April to 30 September) surged to a four-year high of ₹31,241.
This was not the case in equity options—the average trade size in the first half of the financial year was ₹5,941, down from ₹6,246 for the whole of 2023-24.
While the average trade size in stock options increased to ₹16,562 in the first half of Fy25 from ₹15,381 in FY24, in index options, it declined to ₹5,445 from ₹5,897.
As of the end of September, NSE had an 88.9% share in equity options based on premium turnover, with BSE holding the rest.
