F O fever began cooling for prop, retail even before Sebi medicine

A Sebi study spanning FY22-24 showed individuals trading derivatives lost  ₹61,000 crore in FY24 alone. (Reuters)
A Sebi study spanning FY22-24 showed individuals trading derivatives lost 61,000 crore in FY24 alone. (Reuters)

Summary

  • On 31 July, Sebi floated a consultation paper which proposed seven measures to moderate volumes in light of the huge losses to individual or retail clients trading derivatives especially index options. Out of the seven measures, Sebi adopted six on 1 October.

Even before the market regulator tightened screws on equity derivatives trading, one of the segment's biggest constituents—proprietary or prop traders—saw a decline in index options turnover in August, a trend likely to have continued in September. In individual turnover as well, moderation seems to have set in, albeit at a lower pace.

Prop traders' gross premium turnover in index options, the most popular instrument on NSE's derivatives segment, fell 9.5% 11.56 trillion in August from a month ago despite the market rally, exchange data showed. The fall was steeper than individual client turnover decline of 4.66% to 8.61 trillion over the same period.

The trend of declining turnover of prop and retail is likely to have continued in September as well, as the total index options premium turnover during the month fell by almost 7% to 11.37 trillion, NSE data showed.

On 31 July, the Securities and Exchange Board of India (Sebi) floated a consultation paper titled 'Measures to strengthen index derivatives framework' , which proposed seven measures to moderate volumes in light of the huge losses to individual or retail clients trading derivatives especially index options. A Sebi study spanning FY22-24 showed individuals trading derivatives lost 61,000 crore in FY24 alone-- 33,000 crore to prop traders and the rest to foreign investors.

Also read | Sebi's new stress testing methods to boost resilience in equity derivatives

Out of the seven measures, Sebi adopted six on 1 October. The most impactful, which take effect on 20 November, are increasing lot sizes to 15-20 lakh from 5-10 lakh, having only one weekly option series per exchange as opposed to the current five or more, and increasing the extreme loss margin to trade.

However, going by data from NSE, which has over 90% market share in equity options premium turnover, volumes began cooling even before Sebi announced the measures.

"The tightening could be one of the factors behind the decline in turnover, especially as the market rallied in August and September," said Rajesh Baheti, managing director of Crosseas Capital, a proprietary trader. "We should watch out for this month and the next, too. I expect volumes to fall by 30-35% once the new rules take effect."

Agreed Rajesh Palviya, senior vice-president and head (research derivatives & technical) at Axis Securities. "The tightening of rules, increase in STT on index options from 1 October by 60%, and further possible measures like a product suitability framework seem to be having a salutary impact before the rules take effect from next month," he said.

Also read | Market constituents hope for change in Sebi's derivatives plans

The fall in prop and retail turnover coincides with Nifty rising over a percent to 25,236 in August and 2.28% to 25811 in September.

Sebi has been raising concerns over retail losses in derivatives trading since last year. In May 2023, it directed brokers to run disclaimers on risks of derivatives trading on their apps or online websites. This year's actions come after the disclaimers not having deterred retail, despite continuous losses in the segment.

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