SEBI will consider rules to limit a surge in derivatives trading, people familiar with the matter said, after growing retail participation took the speculative bets to the highest in the world.  

The Securities and Exchange Board of India will discuss the measures proposed earlier in July — including limiting the number of options with weekly expirations and raising the minimum contract size — at a board meeting Monday, the people said, asking not to be identified before a final announcement. 

Authorities are trying to raise barriers for retail investors, who are channelling household savings into risky assets and pushing annual turnover in derivatives above the output of Asia’s third-largest economy. The move would mark the most sweeping SEBI intervention since the Covid-19 pandemic, when the regulator sought to curb excessive short selling through derivatives during a market crash. 

The limits would shield individual traders — nine out of 10 lost money in the segment in the three-year period ended March, according to SEBI’s latest study. Exchanges and brokers, however, are poised to suffer. Analysts estimate volumes in equity derivatives would shrink by about one-third. 

Profits at global quantitative trading firms’ may also come under threat just as they started expanding in the country’s $5 trillion stock market. Optiver BV, Citadel Securities LLP and Jump Trading LLC are among those that have grown their presence in recent years.

Local media reported earlier that the agenda for SEBI’s board meeting would include a discussion on derivatives. A representative for the regulator didn’t respond to an email seeking comments. 

Equity options — highly volatile and risky instruments — have thrived in India because of their low cost and higher leverage. In 2023, investors in the country traded 85 billion of the ­contracts, more than anywhere else in the world. Retail investors now account for more than one-third of the options market, otherwise dominated by high-frequency traders.

The South Asian nation grabbed headlines earlier in the year after the revelation that US-based quant trading giant Jane Street Group made $1 billion in profits in 2023 by trading in the Indian options market. Foreign investors and proprietary trading desks using algorithms pocketed $7 billion in gross profits with futures and options in the financial year ended in March.

SEBI Chairperson Madhabi Puri Buch has described the surge in derivatives trading as a “macro issue” that diverts capital from productive use in the economy. Her warnings — and tax hikes coming into effect next month — have helped bring down the volume of contracts traded from a record $6 trillion in February. 

SEBI’s urgency to tighten the market further underscores the authorities’ worries over the segment that has grown over 40-fold since 2019.

“The new proposals could be implemented in a phased manner as SEBI may not want to shock the system,” said Abhay Agarwal, fund manager at Piper Serica Advisors Pvt. “The regulator’s main agenda would be to limit the use of these instruments for speculative activity, while ensuring that their utility for hedging portfolios remains.”

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