Stock market regulator, the Securities and Exchange Board of India (SEBI), has finally bitten the bullet and begun implementing far-reaching changes in the equity index derivative segment. These changes had become exigent because speculative activity had increased manifold in this segment since the pandemic, with retail investors participating in a big way. There is also an unhealthy concentration of trading activity, with almost 98 per cent of equity futures and options trading on the NSE limited to just Nifty50, BankNifty and FinNifty options. Besides, most trading is observed in weekly option contracts expiring on a particular day, due to the lower option premiums on the expiry day.

The regulator had to act fast given that individual investors were getting increasingly lured into F&O trading. A recent study done by SEBI revealed that 93 per cent of individual investors made losses while trading in equity futures and options between FY22 and FY24 and total loss incurred by them stood at ₹1.8 lakh crore in this period. With average loss incurred by each of these traders at ₹2 lakh over the three years, this activity is clearly resulting in a loss of capital for a large section of society. The study also pointed out foreign portfolio investors and brokers trading on their proprietary books raked in profits, as they have the deep pockets and skills to use sophisticated algorithmic trading tools. With a similar study conducted by SEBI in January 2023 indicating the same, the regulator was quite sure that trading in the F&O segment was hurting individual traders. Meanwhile, exchanges are stoking this frenzied activity with multiple weekly option contracts. Brokers lure gullible individuals with promises of quick riches.

It is well that SEBI has accepted most of the recommendations of the working group, headed by G Padmanabhan, which has done a detailed analysis of the activity in the F&O segment and given practical suggestions to curb it. The increase in contract sizes from the current ₹5- 10 lakh to ₹15-₹20 lakh will help cut some of the speculative positions. Similarly, the move to collect upfront margins from option buyers will remove the leverage currently available for doing intraday trading. This coupled with intraday monitoring of position limits will ensure that brokers do not allow their clients to trade excessively during the session. Increase in extreme loss margin around the expiry day will help curb the tendency to trade on that day. The move to reduce weekly derivative contracts to a single benchmark index of an exchange is especially useful as it will reduce the avenues available for speculation.

There is likely to be strong opposition to these changes since exchanges as well as brokers stand to lose a significant portion of their business once they are implemented. But the regulator needs to go ahead with the changes for sustainable growth of the market, and for protecting individual investors.