Sebi Targets Retail Speculation in F&O Trading with New Discussion Paper

The Securities and Exchange Board of India (Sebi) is preparing to release a discussion paper aimed at curbing retail speculation in Futures and Options (F&O) trading. This move comes after the Padmanabhan Working Group Committee suggested measures to limit small retail investors from the equity F&O segment due to fears of increasing losses.

Panel Recommendations

The Padmanabhan panel, led by former Reserve Bank of India executive director G. Padmanabhan, recommended raising the trading costs to deter small investors. The suggestions include increasing the contract value of derivatives, widening the price intervals between options contracts, and reducing the frequency of index option expiries from five times a week to once a week.

Sebi Board Review

These recommendations are significant and may be reviewed by the Sebi board, led by Chairperson Madhabi Puri Buch, before any decisions are made.

Concerns Over Retail Activity

The move follows concerns about retail investors’ high activity in trading index options, such as Nifty and Bank Nifty, especially after the pandemic. RBI Governor Shaktikanta Das highlighted that equity derivatives trade turnover has surpassed India’s nominal GDP.

Surge in Equity Derivatives Turnover

Data from the National Stock Exchange (NSE) shows that the notional turnover of equity derivatives increased 23-fold, from ₹3,445 trillion in FY20 to ₹79,928 trillion in FY24. Index options alone accounted for 98% of this turnover. The actual traded turnover of index options also rose significantly during this period.

Previous Sebi Measures

Two years ago, Sebi required brokers to include disclaimers on their platforms, warning that most derivatives traders incur losses. This led Sebi to consider additional measures to curb retail exuberance in F&O trading. Typically, the counterparties to retail traders are tech-savvy, well-funded proprietary traders.

Impact on Market Turnover

Retail investors’ market share in premium turnover of index options was 35.5% in FY25, while proprietary traders’ share dropped to 46.1%, according to NSE data. If Sebi implements the panel’s recommendations, such as increasing lot sizes and price intervals, and reducing product expiries, it could reduce market turnover by up to 20%.

Expert Opinions

However, some experts believe these measures might not effectively limit retail trading. Analyst Sandip Sabharwal suggests that eliminating weekly expiries in favor of monthly ones might be more effective. He argues that weekly options tend to be cheaper, leading many retail investors to buy them and often lose money.

Future Measures

To discourage retail participation in F&O, the panel suggested increasing the contract values, such as raising the price of a Nifty futures contract from ₹5-6 lakh to ₹25-30 lakh, and reducing the number of expiries per week.

Weekly Expiry Options

NSE and BSE have already launched weekly expiry options for various indices. Sebi’s latest measures aim to address the growing gap between retail traders and non-retail traders, who often use advanced algorithms and data analytics for trading.

Technological Edge

Nilesh Shah, MD of Kotak Mahindra AMC, noted that professional traders have a technological edge over most retail investors, who lack access to similar tools and analytics.