The market regulator Sebi's proposed seven futures and options (F&O) measures, if implemented, are likely to hit stock exchanges NSE and BSE hard, with market volumes likely to plunge 30-40 per cent. The bigger hit would be seen in terms of fall in investor count, IIFL Securities said as it felt discount brokers would be at greater risk.
Among the seven proposed steps to curb retail speculation in the derivatives, the highest impact is likely from rationalisation of weekly options, as Sebi proposed only single benchmark index per exchange. To be sure, index options account for 98 per cent of the total volumes. Increasing the contract size by 2-3 times would also constrained small retail investors but IIFL Securities believe this may lead to higher decline in investor count than volumes.
"Finally other measures like increasing ELM around expiry, withdrawal of calendar spread margin on expiry will increase the margin requirements and thereby could impact the liquidity. Based on our initial estimates we expect a 30-40 per cent impact on market volumes," the brokerage said.
IIFL Securities sees higher impact for NSE as options account for 60 per cent of its revenues (FY25ii), while for BSE it is 40 per cent. IIFL Securities estimates a 25-30 per cent impact on NSE’s FY26ii earnings and 15-18 per cent for BSE.
"We don’t see any impact on MCX from these regulations. Within the value chain – discount brokers are likely to be more impacted than traditional full service brokers given former’s dependence on retail investors. Our earnings impact calculations are based on initial assessment which we would fine tune as more clarity emerge on the likely impact of proposed measures," it said.
In the case of weekly contracts, NSE’s option volumes may hit hard as it has four weekly index expiries. More importantly its biggest contract – Bank Nifty which contributes 50 per cent of NSE option premium volumes will be changed to monthly contract. In all, across three expiries (Bank Nifty, Fin Nifty and Nifty Mid-cap -- the move will impact 60 per cent of volumes.
The net impact of NSE’s full year volumes could be around 30-35 per cent (assuming one expiry and some increased traction in Nifty contract, IIFL Securities said.
The impact of BSE should be limited given that it has only two contracts. Out of the two – Sensex contributed 85 per cent of the volumes in FY24. Assuming Bankex would have contributed 30 per cent by FY26, still the impact is lower compared to NSE.
"Also, with just two expiries now – BSE may see higher volume traction and a faster market-share gains thereby further limiting volume impact. In base case we assumed 20 per cent hit on BSE volumes," IIFL Securities said.
In the case of increase in minimum contract size is concerned, NSE’s turnover distribution data suggests 46 per cent of its unique investors were trading less than Rs 1 lakh monthly premium turnover but they also contributed only 0.2 per cent of Option premium turnover.
"Having said that the actual impact could be higher assuming many rolls by retail investor in a day (SEBI highlights that on an average retail is holding options for only 30 minutes), thus retail investor may be falling even in higher brackets. The impact of these may be more on discount brokers who services more of retail investors compared to traditional full service brokers," it said.
Rationalisation of options strike would enable Sebi to restrict speculative volumes but IIFL Securities believes the impact on stock exchanges would be marginal given low premium contribution from far out of the money strikes. Besides, few brokers have proactively restricted trading in far out-of money option contracts.
In the case of upfront of option premium collection, IIFL said its interactions suggest most brokers are already collecting premiums on upfront basis and to that extent there shouldn’t be much impact.
The removal of calendar spread benefit on expiry day implies higher margin requirements for prop and algo trader which could impact volumes. That said, IIFL's analysis of volume comparison between current week expiry and next week expiry do not show significant volumes using calendar spreads.
"The latest week data for Nifty and Bank Nifty shows 2-3 per cent impact on volumes. However our discussion with market participants suggest there could be impact on delta hedging strategies. We await more clarity to quantify the impact of this," it said.
V K Vijayakumar, Chief Investment Strategist, Geojit Financial Services said Sebi’s crackdown on F&O trade is eminently desirable and can go a long way towards making the ongoing rally healthy and less speculative. "The irrational exuberance of the retail investors, particularly the newbies who entered market after the Covid crash, will do more harm than good to the overall market in the long run. Therefore, these regulatory measures are to be welcomed," he said.
Zerodha co-founder Nithin Kamath said: "From what I’ve seen at Zerodha, futures traders have higher odds of making money than option buyers. On a gross basis, futures traders are profitable about 50% of the time as opposed to options traders, who are only profitable about 10% of the time. This is because options come with almost unlimited leverage, whereas leverage on futures is capped at 6 times (15% for index)," Kamath wrote in post on X.