The Securities and Exchange Board of India as expected after several consultation papers and studies, brought in key changes to its index derivatives framework, in a bid to curb wild speculation among retail investors.

The major changes include: hiking the contract size to ₹15-20 lakh from ₹5-10 lakh; exchanges are allowed to launch weekly options on only one of their benchmark indices, eliminating the benefit of off-setting positions across different expiries, referred to as ‘calendar spread’ on the day of expiry for contracts; collection of options premium upfront from option buyers; and the existing position limits for equity index derivatives will be monitored intra-day by exchanges, instead of end-of-day.

Last month, SEBI also revised the eligibility criteria for entry and exit of stocks in the derivatives segment.

Given the inherent leverage and higher risk in derivatives, this recalibration in minimum contract size, in tune with the growth of the market, would ensure that an inbuilt suitability and appropriateness criteria for participants is maintained as intended,” the SEBI said.

The BSE has already said that its Weekly Index Derivatives contracts on Sensex50 will be discontinued from November 14.

Potential Pitfalls

It is widely believed these measures are likely to curb the retail frenzy in derivative trading, which has surged in recent years. According to the NSE, between March 2020 and March 2024, the monthly derivatives turnover increased nearly 30 times to ₹7,218 lakh crore.

However, there could be some negative fallouts as well from the above initiatives, as it is more of psychological issue.

For instance, when F&O was introduced in 2000, Nifty futures and Satyam Computer were the most active (Satyam because of lot size. When Satyam Computer was caught in the scam, the trading activity shifted to Bank Nifty. To rein in the frenzy in Nifty, the NSE introduced mini-Nifty ( with a lot size of 20) but was compelled to withdraw it in 2012 as over-enthusiastic retail traders over-traded in it.

Risky shifts

Some retail traders who are addicted to F&O trading may now shift to the cash segment and indulge in heavy day trading. Their target could be penny stocks and low market-cap stocks. Often, gullible retail investors fall prey to these pump-and-dump stocks. This may come as a blessing in disguise for dubious finfluencers who will easily target their vulnerable prey.

Traders may also transition to commodity or rupee derivative trading, where the risk is even higher.

Illegal trading

However, the biggest problem could be traders entering dabba trading in a big way. Dabba trading is an illegal and unregulated form of trading in securities where transactions happen without the actual trade being executed. As these trades are settled internally by the dabba operator, they are outside the purview of stock exchanges and regulatory bodies.

Since trades are not executed on official stock exchange platforms, investors cannot access the grievance redressal mechanism of stock exchanges.

Instead of too much restriction, SEBI may consider a short trading ban (say, three months) if an investor makes losses in three consecutive trades. Bringing a position limit for retail players in the derivative segment could be another tool. This would give traders time to rework their strategy too. However, the best solution should be investor education, catching prospective investors at young age and explaining the concept of risk-reward ratio.

But that will take quite long time.

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