Retail investors’ participation in derivatives trading has seen staggering growth while that of corporates and foreign investors has been declining over the last four years.
Sharing the data on social media platform X, formerly Twitter, Zerodha Founder & CEO Nithin Kamath said there is a lot of exuberance among retail investors and their participation in options trading turnover has increased.
As per the data, the participation of individual investors and proprietary traders in options trading increased from around 8 lakhs in FY19 to around 45 lakhs in FY23. However, he believes there’s more to the story.
“Starting in 2020, the share of corporates, foreign investors, and DIIs in option turnover dropped from about 30% to 9.9%. This is primarily due to the market-wide position limit of ₹500 crores (5000 lots of nifty), which was introduced during COVID-19 in March 2020. That means no one can hold the derivative unhedged position of more than 500 crores or 5000 lots,” Kamath noted.
So, he believes the contribution of corporates and Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII) traders has slowly fallen, and hence, the share of individual investors and proprietary traders has gone up.
For the eleven months of FY24, i.e. April 2023 to February 2024, the share of proprietary traders in index options gross premium turnover was highest at 48.9%, followed by that of individual investors at 35.1%.
Meanwhile, as per a recent report by Bloomberg News, Indian investors traded 8,500 crore options contracts in 2023, the highest in the world. Retail investors in India make up 35% of options trades, while institutions, seeking to hedge their risk or profit for their companies’ accounts, handle the rest.
As per a study by the capital markets regulator Securities and Exchange Board of India (SEBI), 90% of active retail traders lose money trading options and other derivative contracts. In the year ended March 2022, investors lost $5.4 billion.
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