India's retail traders lose $9.6 billion in options despite curbs

The losses eased slightly from ₹1.1 trillion a year earlier, while the number of traders fell to fewer than 8 million from 9.8 million, according to a written reply by MoS Finance Pankaj Chaudhary

By Chiranjivi Chakraborty

 

Indian retail traders lost ₹91,685 crore ($9.6 billion) trading equity futures and options in the year ended March, showing that a regulatory clampdown has so far had only limited success in stemming the heavy losses incurred by individual investors.

 

The losses eased slightly from ₹1.1 trillion a year earlier, while the number of traders fell to fewer than 8 million from 9.8 million, according to a written reply by Minister of State for Finance Pankaj Chaudhary.

 

The reduced participation follows a regulatory clampdown after the Securities and Exchange Board of India found that nine out of every 10 retail traders lost money trading derivatives — despite repeated warnings about the risks of competing against better-funded, more experienced players. Yet a fifth straight year of losses underscores the limits of those efforts and the challenge of dissuading individual investors from trading them.

 

“Regulator and government needs to think why year after year we see these losses,” said Abhay Agarwal, founder at Piper Serica Advisors Pvt. “At some point, more needs to be done to plug this hole and to protect retail investors.” 

 

Sebi has increased contract sizes, tightened position limits and put in other safeguards to curb participation in options. The central bank last month introduced tighter funding rules for proprietary traders and stock brokers.

 

The stricter rules are hurting the stock exchanges — among the biggest winners of India’s retail trading boom. The average daily notional turnover for futures and options listed on the National Stock Exchange of India Ltd. declined 23 per cent to ₹214 trillion ($2.2 trillion) in July from June, a 17-month low.

 

The trading-loss data are significant for India’s $5.2 trillion stock market. In March, Sebi Chairman Tuhin Kanta Pandey told local media that the regulator would take a data-driven, balanced approach to curb excessive speculation in equity derivatives, focusing only on short-tenor index options. 

 

Despite the curbs, retail traders’ influence in equity derivatives trading has grown. Individuals account for nearly 31 per cent of trading in these contracts, which offer a relatively cheap way to speculate on stock-price moves, up from 26 per cent last year, according to NSE data. 

 

But the clampdown has also reshaped activity among the market’s biggest players. As trading futures and options has become more expensive, proprietary traders, including high-frequency trading firms, have seen their share of notional derivatives turnover at the NSE fall to 58.1 per cent in June from more than 60 per cent last year.

 

“Lot of the curbs by the regulators have not led to the right impact as a whole,” said Tejas Shah, head of derivatives at Equirus Securities Pvt. “Regulator’s intention is probably right to keep retail traders away from options, but at the same time, it is harming institutional investors,” he said.