Brokers asked to run warnings on F&O trading risks

MUMBAI : Swarms of inexperienced retail investors, lured by the promise of getting rich quickly by trading equity derivatives, have faced substantial losses recently, prompting the market regulator to intervene.

The Securities and Exchange Board of India (Sebi) has asked stock brokers to alert investors about the risks of trading in futures and options (F&O) on their websites, as well as every time they place a derivatives order, two brokers confirmed.

Brokers must now alert their customers about facts on derivatives trading such as; nine out of 10 individual traders in equities F&O incurred net losses; on average, they had net trading loss close to 50,000; they also spent 28% more of net trading losses as transaction costs; and in the rare instances when they made net trading profits, they incurred 15-50% of such profits as transaction costs.

An email sent to a Sebi spokesperson seeking comment remained unanswered till press time.

“It’s akin to the warning on cigarette packets about the harmful effects of tobacco. Does it stop people from smoking?” questioned Rajesh Baheti, director of broking company Crosseas Capital, when asked whether such disclaimers would act as an effective deterrent. He claimed that the disclaimers come in the wake of discount brokers “luring” retail investors to trade on equities options, and it was more like “caveat emptor” — a note of caution for buyers.

Interestingly, Nithin Kamath, co-founder of Zerodha, the country’s largest retail broker, said his company recently warned its active clients about the pitfalls of trading in derivatives.

“We have used every opportunity to create awareness that in the long run (three-year period), less than 1% of those who actively trade equity futures and options generate returns higher than bank fixed deposits or 7% annually,” Kamath said.

Deven Choksey, promoter of KRChoksey Group, confirmed the Sebi diktat, adding it would make investors “cognizant” of the risks they faced while dabbling in such instruments.

While retail investors’ participation in the capital markets segment of the country’s largest stock exchange NSE has fallen sharply, their derivatives exposure continues to remain high. In the cash market, where shares are bought and sold, the share of retail investor trading plunged to 36.5% in FY23 from 45% in FY21. The market share of retail investors in derivatives shot up with the outbreak of the covid at the end of FY20 and moderated thereafter but remains high compared with foreign portfolio investors and corporates, NSE data shows.

As a percentage of notional turnover, the retail market share jumped to 29.2% in FY21 from 23% in FY16. In FY23, it stood at 27.7%, down 30 bps from FY22. It is significant that this class of investors is the second-largest after proprietary traders (53.1% in FY23 from 48.8% in FY22) in the derivatives segment.

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