The equity futures and options segment has witnessed a large influx of new traders since the pandemic who are driving trading volumes to levels not seen before in the derivatives market. Around 95 billion lots of derivatives were traded in FY24, registering an 18-fold increase since FY20.

The Centre has tried to douse the speculative fervour by proposing to increase the securities transaction tax in the Budget on sale of an equity option from 0.0625 per cent to 0.1 per cent of the option premium. STT on sale of equity futures has also been doubled from 0.0125 per cent to 0.02 per cent of the price of the future. But these hikes are not enough as they result in negligible increase in trading cost and do not act as a sufficient deterrent. This is reflected in derivative volume hitting a record high the day after the Budget and the stock market shrugging off the announcement easily. 

The hike in STT needs to be followed by other measures by the market regulator SEBI. The risks faced by traders in this segment is being regularly flagged by the regulator in various forums. A SEBI analysis released in January 2023 showed that the number of unique traders of top 10 brokers in equity F&O segment had increased from 7.1 lakh in FY19 to 45.2 lakh in FY22. Of concern is that the share in market turnover of young traders aged between 20 and 30 years increased to 36 per cent in FY22, up from 11 per cent in FY19. This shows that many of the youth are turning to full time trading as a livelihood. The study also revealed that 9 out of 10 traders recorded a loss of ₹1.1 lakh in FY22. A similar study released by SEBI this week points towards rampant speculative activity of young traders in the cash segment of the equity market as well. With the stock market in an unrelenting rally, the younger traders are getting lured by the hopes of riches, unaware of the capital risk in this activity.

A comprehensive set of rules need to be issued by SEBI to supplement the STT hike. With a large chunk of the equity derivatives trading concentrated in the Nifty50 and BankNifty contracts, excessive trading in the derivative segment is not good for the long-term growth of the market. The regulator should consider implementing some of the proposals suggested by the working group headed by former RBI executive director G Padmanabhan to check the unbridled activity in the cash and derivative segments. A sharp increase in contract sizes of futures and options is one way to check speculation as the higher capital requirement can act as a deterrent for small investors. Similarly, increasing the margins needed for trading in futures contracts or insisting on upfront payment of option premiums, along with intra-day monitoring of margins collected by brokers could also make some of the smaller traders move away. The intermediaries also need to be warned about not encouraging the entry of new traders with limited resources to derivative trading. Traders should be screened at the intermediary level and turned away if found too vulnerable.