Retail losses in derivatives is a macroeconomic concern: Ashish Gupta

Individual investors lost over Rs 1 trillion in derivatives trading during the financial year 2024-25 (FY25), which equates to 6 per cent of household financial savings. Ashish Gupta, chief investment officer, Axis Mutual Fund, who flagged excesses in India’s options markets in his 2023 report- Gamification of Indian Equities, says abundant liquidity and inexperienced investors have turned India’s options market into a playground for global trading firms. In an interview with Samie Modak, Gupta warns that the scale of retail losses has macroeconomic implications, making some regulatory restrictions inevitable. Edited excerpts:

What is your perspective on the current state of the markets?

The past six months have been eventful, with significant macro developments, including geopolitical tensions, which markets have largely overlooked. There have also been large macro events like changes in global tariff policies and domestically, the rapid monetary easing. Notably, the impact of both these is not yet visible in economic data. In the US, there has been a roughly 10 per cent average tariff increase despite the rollbacks. However, yet, neither a significant slowdown nor a spike in inflation has materialised. This may be due to inventory build-up ahead of tariffs. We’ll need to monitor inflation data from August onward to gauge the true impact.

 

Similarly, in India, the Reserve Bank of India's (RBI’s) shift from deficit to surplus liquidity over the past six months, coupled with lower interest rates, hasn’t yet translated into stronger economic numbers. Consumption and credit demand remain soft, with credit growth at around 8-9 per cent. Monetary policy effects typically lag, so we expect a potential pickup in the second half of the year. 

 

Markets are in a wait-and-see mode, looking for these signals to materialise, which will shape their direction. 

Are markets pricing in optimistic scenarios for a second-half recovery?

Yes, the sharp rebound in markets reflects optimism about a second-half recovery, with much of this priced in already. We anticipate modest returns and consolidation in the near term. However, India’s rebound isn’t solely driven by domestic factors. Globally, markets like the Eurozone (up about 30 per cent YTD) and Asian markets like Hong Kong and Korea (up 25-35 per cent) have outperformed, while India has lagged, with YTD returns of about 7-8 per cent. This underperformance stems partly from India missing out on the global equity rally driven by a weakening dollar. Thus, the rebound is as much a global phenomenon as a domestic one.

Is India’s underperformance due to valuation concerns or other factors?

Valuations are part of the story, but softer growth numbers also play a role. India’s earnings growth this year, projected at 11-12 per cent, is better than last year’s 7 per cent but slower than the 2021-24 period.

 

Other markets, starting from a lower base, are seeing comparable or stronger double-digit earnings growth, which has supported their outperformance. The lack of robust growth data in India has contributed to its lag relative to Asian and European peers, alongside the broader trend of investing in non-US assets. 

Are there sectors or themes well-positioned in the current environment?

Certain pockets are growing faster than the broader market, such as quick commerce, renewables, real estate, hospitality, and healthcare (hospitals and CDMOs). However, these are already priced for growth, so the market is aware of their potential. A key area to watch is consumption, which has lagged due to weak volume data, particularly in urban areas. Auto sales, for instance, have been soft.

 

If urban consumption picks up due to better credit availability and lower inflation, this theme could gain traction, though it remains data dependent.

Have you studied Sebi’s recent order on July 3 against Jane Street? Does the activity in question constitute market manipulation or standard practice among HFTs and algo traders?

The Indian options market is disproportionately large compared to the cash market, with notional values reaching 400x the cash market, up from low double-digits a few years ago. This growth, particularly on expiry days when low premiums create high leverage, suggests activity beyond hedging, as notional values should correlate with the underlying if used for hedging. Futures, for comparison, are only 2x the cash market and stable. 

 

Sebi has introduced measures like limiting weekly expiries to two, increasing lot sizes, and calculating open interest on a delta-equivalent basis to curb speculative activity. The July 3 order should be seen in this context, as Sebi aims to bring order through regulatory and supervisory actions. As far as arbitrage is concerned, a true arbitrage involves equal-sized trades on both legs. Unequal trades suggest directional bets, not arbitrage, which may be what SEBI is targeting.

Do Sebi’s measures to curb speculative activity risk stifling liquidity?

Liquidity isn’t a concern in India’s markets, which have become highly liquid, as evidenced by over $18 billion in block deals in the past two months, including promoter and private equity stake sales. Sebi’s measures are necessary to align the derivatives market with its underlying cash market, as the current disconnect is unsustainable. Retail losses in derivatives are significant— Rs 1 trillion last year, equating to 6 per cent of household financial savings. This is a macroeconomic concern, contributing to low deposit growth and weak household savings. The measures aim to protect retail investors and ensure market stability.

 

Is India’s options market attracting global HFT firms due to high retail participation and their lack of sophistication?

India accounts for about 60 per cent of global options contracts despite being only 4 per cent of global market cap, driven by high liquidity and relatively unrestricted retail access to options. In contrast, markets like the US have stricter rules for retail participation in options trading. This open access, combined with high retail activity, attracts HFT firms seeking to capitalise on liquidity and less sophisticated retail traders, creating opportunities for profit.

Should Sebi introduce guardrails like income or knowledge thresholds for retail investors in options trading?

Implementing guardrails is challenging in India due to difficulties in verifying income or certifications. Sebi has tried measures like mandatory loss disclosures at login, but these haven’t significantly curbed activity. Concepts like accredited investors, used in AIFs and PMS with high investment thresholds, are hard to apply in options markets, where low premiums on expiry days reduce entry barriers. Regulators need to explore practical thresholds to balance access and protection. 

Can regulators encourage a shift to longer-dated options contracts to reduce expiry-day speculation?

Shifting retail investors to longer-dated contracts is difficult because the appeal of expiry-day options lies in their low premium-to-notional ratio, offering high leverage. Monthly options require significantly higher premiums for the same notional exposure, making them less attractive to retail traders seeking quick, low-cost bets. Regulatory efforts to drive this migration face challenges due to these economic incentives.

Will new instruments like the Specialised Investment Funds (SIF) reduce retail participation in direct options trading?

Specialised Investment Funds, with a Rs 10 lakh minimum ticket size, targets a different investor profile than retail options traders rather than mutual fund investors. As noted in my 2023 report on gamification, these demographics are distinct. SIF is unlikely to divert options traders, as it caters to a higher-net-worth segment seeking professionally managed derivative exposure.

If retail investors ignore warnings and continue trading despite losses, how much can regulators or brokers do?

That is ultimately a philosophical question. The current magnitude of retail losses, however, has macro consequences— pressure on household savings and deposit growth— so some form of threshold-based access may be unavoidable.