‘Derivatives market often appeals to human instinct for gambling’

In line with the concern raised by the capital market regulator SEBI, the Economic Survey noted the allure of quick profits can be misleading, as the majority of participants in derivatives markets end up facing losses.

With its potential for outsized gains, derivatives market often appeals to the human instinct for gambling. This dynamic has driven significant retail participation in derivatives trading. However, the reality of derivatives trading is starkly different from its promise. Globally, derivatives trading loses money for investors, for the most part, said the survey.

“Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading,” it said.

Risk associated with derivatives trading

The risks associated with derivatives trading are not merely theoretical. A significant stock market correction can lead to substantial losses, particularly for retail investors engaged in derivatives. These losses could provoke a strong negative behavioural response, with investors feeling “cheated by unseen more considerable forces, said the Economic Survey.

Such experiences could deter retail investors from returning to capital markets for a long time, which would be detrimental to both their financial well-being and the broader economy, it said.

Rapid financialisation

In a broader context for understanding the potential pitfalls of rapid financialisation, the survey pointed the financialisation of economies has not ended well, even for advanced economies and the global financial crisis of 2008 is an obvious example.

Stating the risks are even more pronounced for developing countries, the survey cited the Asian financial crisis of 1997-98, which severely impacted the high-flying economies of the region. These examples illustrate the dangers when financial market innovations and growth outpace economic growth.

India needs to have an orderly and gradual evolution of the financial market to avoid the destabilising effects that have plagued other economies, it said.

The survey said all stakeholders must ensure that capital markets play their theoretically assigned role of directing savings to their most productive investments. “It is not just in the national interest. It is an act of self-interest, too,” said the survey.

SEBI Chairperson, Madhabi Puri Buch | Photo Credit: KUNAL PATIL

Madhabi Puri Buch, Chairperson, SEBI said the turnover in index options in premium terms has gone up from ₹4.5-lakh crore in 2018 to ₹140-lakh crore in 2024. While overall turnover in the derivatives segment has gone up from ₹210- lakh crore in 2018 to ₹500-lakh crore in 2024.