Sebi Moves to Protect Investors as 93% of F&O Traders Face Losses

Individual traders in the futures and options (F&O) market witnessed an aggregate loss of Rs 1.8 lakh crore in aggregate losses over the past three financial years. Over 93 per cent of more than 1 crore investors, or nine out of 10 traders, incurred average losses of Rs 2 lakh each, according to the latest study by the Securities and Exchange Board of India (Sebi) released on September 23.

Notably, the top 3.5 per cent of loss-makers, about 4 lakh traders, suffered an average loss of Rs 28 lakh each over the three years from FY22 to FY24, inclusive of transaction costs.

In July this year, Sebi chief Madhabi Puri Buch said the regulator is compelled to warn against speculative bets in the F&O segment because it has become a macro issue. Household financial savings are going into the speculative bets, against the expectations of being used for capital formation and the youth is losing tonnes of money in such trades, Buch said. She said that we felt compelled to dissuade investors from the F&O segment proactively.

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According to the Sebi report, nearly 91.5 per cent of small traders (those trading less than Rs 1 lakh) lost money in FY24. Reasons for these losses include market volatility, small price changes, transaction costs and psychological factors that work against the average trader.

On average, each trader paid Rs 26,000 just for transaction fees in FY24. Over three years, from FY22 to FY24, traders collectively paid Rs 50,000 crore in these costs, which significantly eroded their profits.

Volumes in the F&O segment have seen an exponential rise amid heightened market awareness, improved access to financial products and mis-selling by fin-fluencers or social media platforms. Despite fin-fluencers claiming that it is easy to make 1 per cent daily return in options trading, the Sebi analysis revealed that only 1 per cent of individual traders managed to earn profits exceeding Rs 1 lakh.

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How Sebi Plans to Protect Investors in F&O Market?

The markets regulator is expected to introduce stricter rules for F&O trading soon to enhance investor protection and promote market stability in derivative markets. In its consultation paper floated in July, the regulator proposed seven measures, including increasing minimum contract size and upfront collection of option premiums, intra-day monitoring of position limits, rationalisation of strike prices, removal of calendar spread benefit on expiry day and increase in near contract expiry margin.

Key measures include limiting weekly option contracts to one index per exchange. Benchmark indices NSE Nifty50 and BSE Sensex will only have weekly expiry, and other indices will expire on a monthly basis.

Additional proposals include requiring traders to increase their collateral, especially as contracts near expiration, and raising the minimum contract size from Rs 5 lakh to a range of Rs 15-20 lakh.

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This will be further raised after six months of the introduction of the contract – a move aimed at creating higher entry barriers to promote more responsible trading practices.

In addition, Sebi also proposed to increase Nifty lot size from 25 to 75, Banknifty lot size may increase from 15 to 30. It may result in a high margin requirement for purchasing 1 lot in index derivatives which will directly impact small retail traders.

According to market analysts, these measures might reduce trading volumes, but they are a step in the right direction for long-term market stability.

In August, Sebi whole-time member Ananth Narayan G stated that it is not Sebi’s intent to ban derivatives. The primary intent of the regulator is to restrict derivative trades to curb the “expiry day frenzy” in options trading.

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In the Union Budget in July, the government raised the securities transaction tax (STT) on both futures and options trade from October 1 to address concerns about hyperactive interest in the derivative segment.

Prior to that, the Economic Survey flagged concerns over rising retail investors’ interest in derivative trading. The survey stated that speculative trading has no place in a developing country.