‘Impact will be 60% of overall F&O trades...’: Nithin Kamath on SEBI’s curbs on index derivatives trading 

Nithin Kamath, Zerodha CEO, in a post on social media highlighted the potential impact of SEBI’s rollout of proposal plan to protect retail F&O investors and improve market stability, including reducing expiries to a weekly basis. 

The Securities and Exchange Board of India (SEBI) has formulated a six-step plan to curb retail participation in speculative index derivatives, which may lead to a substantial drop in volumes potentially by 30-40 percent. 

“Here’s the potential impact of only one weekly expiry of index derivatives per exchange and contract sizes going up by around 2.5 times. As things stand, assuming that those trading weekly don’t move on to trading monthly, the impact will be 60 percent of overall F&O trades and 30 percent of our overall orders,” wrote Kamath. 

The market regulator has rolled out these measures after taking into consideration the highly speculative nature of trading on index derivatives, particularly on expiry day of the contracts. 

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 new norms for derivative trading will be rolled out in phases, starting November 20. Index derivative contracts with weekly expiries, increase in contract sizes and increase in tail risk coverage by levying additional extreme loss margin (ELM) will be launched from that day. 

“I guess things will become much clearer from November 20th. We will then decide on our change in pricing structure, based on the impact on the business,” Kamath added. 

The new rules will also limit weekly expiries to one benchmark per exchange, bring intraday monitoring of position limits, and remove the calendar spread treatment on expiry days. 

F&O trading impact on investors 

A recent study conducted by capital markets regulator SEBI revealed that over nine out of 10 individual traders in the equity futures and options (F&O) segment continue to incur significant losses. This study follows up on a report published by SEBI in January 2023, which found that 89 percent of individual equity F&O traders lost money in FY22.  

“93 percent of over 1 crore individual F&O traders incurred average losses of around Rs 2 lakh per trader during the three years from FY22 to FY24,” the report said. The aggregate losses of individual traders exceeded Rs 1.8 lakh crore over the three-year period between FY22 and FY24, the study also said.  

“With increased participation of individual investors in equity and equity derivatives markets, the current study was undertaken to analyse profit and loss patterns for individual traders in F&O during the three years FY22 to FY24, and for all the categories of investors in F&O during the single year FY24,” it added. 

With increased participation of individual investors in equity and equity derivatives markets, the current study was undertaken to analyze profit and loss patterns for individual traders in F&O during the three years FY22 to FY24, and for all the categories of investors in F&O during the single year FY24," it added. 

The study also mentioned that top 3.5 per cent of loss-makers, approximately 4 lakh traders, who faced an average loss of Rs 28 lakh per person over the same period, inclusive of transaction costs. And, only 1 per cent of individual traders managed to earn profits exceeding Rs 1 lakh, after adjusting for transaction costs.