The market regulator SEBI announcing a slew of measures to tame speculative retail trading in futures and options (F&O) segment could have visible impact on retail sentiment and market volumes at large. This, in addition to recent measures including implementation of higher Security Transaction Tax (STT) on F&O trades, could hit revenues of stock exchanges and brokerages, analysts said.
Sebi intends to implement the new rules in a phased manner. The biggest impact on volumes is seen coming from limiting weekly expiry to one per exchange, followed by increasing the contract size to Rs 15 lakh from Rs 5-10 lakh earlier.
The implementation of new guidelines for derivative trading will done in a multiple-stage manner, commencing on November 20. Analysts said there could be a knee-jerk reaction in the market and brokers may witness a dip in transaction volumes, which directly affects their revenue generation.
"The new SEBI guidelines will bring significant changes to F&O trading, and brokers will feel the impact in terms of revenues. We are looking at a likely reduction of at least 20 per cent in both top-line and bottom-line figures, especially with the increase in the contract size to Rs 15 lakh and the limitation of weekly expiries to one per exchange, said Trivesh D, COO at Tradejini.
Increase in contract value of index derivative contracts by SEBI will curb speculation and heightened activity by small individuals and retail participants, who end up taking undue risk and make losses in futures and options segment, said Kunal Sanghavi, Chief Strategy and Transformation Officer, HDFC Securities.
"Index option contracts at Rs 6,484 crore in the 6 months of current fiscal has already reached two-third of last year 12 month number of contracts which was Rs 9,365 crore and is growing at exponential pace year-on-year, demonstrating high participation especially of retail as well which is a concern," he said.
From November 20, new measures on weekly expiries, larger contract sizes, and enhanced protection against tail risks through the imposition of additional Extreme Loss Margin (ELM) will be introduced. Intraday monitoring of position limits atleast 4 times a day shall come into effect from April 1, 2025.
The guidelines on upfront collection of Option premium and removal of calendar spread treatment on expiry day shall come in effect from February 1, 2025. Options prices move in a non-linear way and carry very high implicit leverage, while large volumes are witnessed on the expiry day.
Commenting on the calendar spread, Trivesh D from Tradejini said: "This change adds complexity in managing positions. "The bigger shift may come from limiting weekly expiries to two indices. This could reduce speculative activity to some extent, we might also see a more focused concentration of trades on these two expiries, potentially increasing volatility around these days," he said.
This is a significant development for the industry, and it will take time for the full impact to become clear. In the long run, these regulations aim to bring greater stability and reduce excessive speculation, the transition period will require a lot of adjustment from brokers, Trivesh D added.
A recent report from the capital market watchdog SEBI suggested that individual traders in India experienced net losses amounting to Rs 1.81 lakh crore in futures and options trading from April 2021 to March 2024, with only 7.2 per cent traders managing to make a profit.
Trading derivatives is complex business due to the unpredictable, erratic and random behaviour of the market forces, said Nihit Kshatriya, Sr Research Analyst, Capitalmind Research. To trade in such products, a trader needs better expertise, institutional knowledge, experienced team and technological edge to make money, he said earlier this week.
Citing the recent SEBI study, Kshatriya noted that all the profits in FY24 were made by proprietary firms and foreign portfolio investors (FPI) through algorithmic trading. This mainly involves high-frequency Trading, arbitrage, trend following, or other quantitative strategies. "Brokerage fees, transaction costs, and taxes can eat up to 25 per cent of your profits or add significantly to your losses”, adds Kshatriya.
Some of Market participants believe that the new guidelines by SEBI may inadvertently reduce participation from those investors who could have otherwise contributed significantly to the evolution and liquidity of the market. Over-regulation could dampen the market’s dynamism, affecting India's competitiveness in the global space of derivatives, they argue.
The new guardrails can strengthen market resilience, they also introduce challenges. Stricter norms around leverage, transparency, and capital adequacy could limit the ability of investors to determine their own risk appetite, thereby stifling innovation in trading strategies, said Puneet Sharma- CEO and Fund Manager at Whitespace Alpha
"The challenge now is for market participants to align with these enhanced compliance standards while striving to maintain innovation and growth. Finding a balance between fostering a secure trading environment and allowing the financial creativity needed to drive the market forward will be crucial for sustainable success," he said.
"We may see an impact on the F&O volumes, as it will deter small F&O traders. We can also witness an increase in cash volumes. This would also affect the revenues of retail brokers in the short-term," said Shruti Jain, CSO, Arihant Capital Markets.
"We believe these measures from SEBI are much needed and in the best interest of retail traders, who often lose money in F&O trading. Most mainstream traders lack the tools and the expertise required for derivatives trading. These are meant for highly skilled traders and institutional traders," she said.