SEBI is on a mission to take on the wild, wild west of futures and options in India. Here’s why, what, and how of it

Once upon a time, there thrived a wild, wild land. Here, it was all about super high monetary stakes, lightning-fast trade deals, and bucketloads of money shifting hands every single second. This wilderness lured millions of individuals with the promise of super duper high returns. But, at what cost?

Welcome to the unforgiving, ultra-risky wild west of Indian equity markets called the futures and options.

Here, everyone seems to just fly right through the bright red-flagged warnings of financial risks to earn even a fraction of these promised returns. Most burn themselves in the process, but carry on nevertheless, as if nothing ever happened.

Chasing the cloudy profits

The data conclusively proves that every 9 out of 10 individuals only lost their hard-earned money in this land. But hey, what do the numbers know? Some hide their losses out of shame, some out of fear. The proponents, meanwhile, proudly boast unusually high returns on their investments, some open social media channels while others encourage their friends and family to take the plunge.

Naturally, news of this unstoppable and humongous en-masse migration to the F&O (futures and options) town has reached sheriff SEBI, galvanising them into action. After all, it was time to put a leash on this madness and save the common man. The inhabitants of this town doubled in the last 2 years, from 51 lakh in FY22 to 96 lakh in FY24—99.8% of whom were small and mid-income traders.

But profits? Well, that's a different, rather completely absent story.

Que Sera Sera, much?

A recent report by SEBI (Securities and Exchange Board of India) that studied profits and losses made by traders in the equity derivatives segment between FY22-24 exposed the mad mania of futures and options trading in India, especially since the pandemic.

Per the report, 91.1% of individual traders, or about 73 lakh traders had only lost money trading in futures and options in FY24. Between FY 22-24, over 1 crore traders, or about 92.8% of individual traders, had lost Rs 2 lakh each.

But once bitten, twice shy? Well, not in this case. More than 75% of individuals, who had only made losses trading in F&O in FY22 and FY23, continued to trade vigorously in FY24 as well, without any changes in the bottom line, which remained deep in red and negative.

So, then all these traders must be uber-rich, with tons of cash and not much care to spare? Nope. 76% of traders in the F&O space in FY24 had an annual income of less than Rs 5 lakh. 2 years ago, their share stood at 71%.

And their choice of poison? Options! In FY24, 60% of traders made losses trading in futures, but a whopping 91.5% burnt their funds trading in options.

Mind you, futures are riskier than options. With futures, which require significant capital investment, the buyer and seller both are contractually bound to adhere to the pre-determined strike price of the futures or options contract, irrespective of whether the prevailing prices are higher or lower (and thus, resulting in losses for either the buyer or seller).

With options, since this adherence ain't necessary, individuals end up taking debt to take highly leveraged positions while trading here.

Scale of the explosion

Anyone who trades even infrequently will tell you that a demat account is the mitochondria or powerhouse of the trading cell.

As of August 2024, India had over 17.1 crore demat accounts, which are a prerequisite for trading in the markets. India is the 9th biggest country in the world, in terms of total demat accounts.

Did you know that our demat accounts are at par with the entire population of Bangladesh? Talk about scale! Just 4 years ago, in March 2020, this number was a mere 4 crore.

Naturally, the total F&O turnover on both NSE and BSE has hit the roof, and also broken it. As of October 4, 2024, the total futures and options turnover on NSE stood at a massive Rs 4,78,27,27,750.30 crore. Good luck counting the thousands!


Source : NSE

Another metric that underlines the meteoric growth of trading in India is the collection of STT or Securities Transaction Tax. As of September 2024, India's STT mop-up had gone past Rs 26,000 crore.

Traders have to pay STT whenever they buy or sell any security in the market. So, more trading brings in more STT, and hence, more revenue for the government, so they're not really complaining.

After all, this is certainly what they'd call enviable growth. As of August 2023, our STT collection stood at about Rs 21,599 crores. And in FY20-21, India's STT collection had been Rs 16,000 crore. If only our salaries also managed to grow at this rate!

So, what's happening?

Two things. One, it's the big bulls who are raking in all the moolah. And it's the younger lot (those aged under 30) who are propping them up for this.

In FY24, 43% of individual traders in the market were less than 30 years of age. In just one year, this number has swelled by 12 percentage points from just 31% of individual traders.

But who says ageing is bad? Wrinkles and silver hair seemingly have a propensity of incurring lesser losses in the market. In FY24, only 79% of traders aged above 60 years made losses, as compared to 93% of those aged below 30.

Small and mid-income traders, which make up 98% of the total trader base, witnessed average losses per person of Rs 65,000 and Rs 1.5 lakh in FY24 in futures and options, respectively.

The winner here? Clearly, the big bulls, who declared an annual income of over Rs 1 crore, ended up with average profits of Rs 96,000 per person this year.

What’s the sheriff up to?

The government has finally swung into action, hiking the STT rate for F&O during this year’s budget.

Effective October 1, 2024, the STT on futures stands at 0.02%, up from 0.0125%. For options, it was upped to 0.1% versus 0.0625% previously. Small margins, but huge impact oncoming.

Says Puneet Sharma- CEO and Fund Manager at Whitespace Alpha, “SEBI aims to enhance market stability while safeguarding investor interests, reflecting the regulator's intent to balance risk management with market participation”.

But this might come with its own share of challenges, too. “Stricter norms around leverage, transparency, and capital adequacy could limit the ability of investors to determine their own risk appetite, thereby stifling innovation in trading strategies. Over-regulation in an environment that thrives on strategic flexibility and creativity could dampen the market’s dynamism, affecting India's competitiveness in the global derivatives landscape”, he observes.

SEBI recently came out with a set of guidelines that aim to thwart retail investors' participation in futures and options and hinder them from taking undue risks.

Here's a quick recap of what's to come for the residents of the F&O town

Margin Requirements: To battle the high volatility and chaos which is generally seen on expiry days(i.e the last mandated date, post which an option becomes invalid), SEBI will put in place an extreme loss margin (ELM) of 2% for all open short options on the day of expiry.

Translation? Traders will need to pony up more cash upfront, leaving them with fewer funds to take on risky bets.

It ain't a choice: No more of one expiry every single day! Going ahead, an exchange like BSE or NSE will just be able to offer weekly expiries, that too, only on one benchmark index, as opposed to an entire buffet it currently offers. At present, NSE offers weekly options contracts for its financial index, bank and midcap indices. But say goodbye to this, and hello to derivatives on only 1 index per exchange.

Raising the bar: Effective November 30, 2024, the minimum contract value for index derivatives will be upped to Rs 15 lakh, from the present Rs 5-10 lakh. The hope is that by making it ultra-expensive to enter these trades, investors will be dissuaded from taking on risky trades.

Pay upfront: Starting February 2025, those trading in options will have to pay the entire options premium upfront, even before their trades are executed. This is because options generally carry very high leverage, and paying a significant sum upfront can force traders to think twice.

Invigilation Pro Max: Starting April 1 2025, to make sure that the number of positions for equity index derivatives does not slyly slip over the mandated limit, especially on expiry days when trade volumes are huge, the exchanges will have to take a minimum of 4 position snapshots randomly.

The question is, will these injections of sobriety be enough to calm down the steroid-fed bull of the futures and options market in India? Well, only time and market turnover will tell!

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