India's strict measures on options trading drive speculators out of market

By Chiranjivi Chakraborty and Savio Shetty 

India’s retail options trading activity has plunged to a three-year low, marking an early victory for the nation’s market regulator after it imposed strict measures late last year to rein in the frenzy in derivatives.  The 30-day rolling average of options contracts traded by individual investors on the National Stock Exchange has declined 77 per cent since the first set of curbs by the Securities and Exchange Board of India took effect in November, according to data compiled by Bloomberg.  The number of derivatives traders also slumped to the lowest in 17 months in January, latest data showed, while turnover on major exchanges nosedived.

 

The sharp pullback in individual participation suggests the end of India’s retail-driven options trading boom, which had

made the country the world’s largest market for these instruments. With dwindling trading volumes, option prices have

risen as the gap between buy and sell prices, or the bid-ask spread, has widened.

 

The past few years were “really an abnormal time” for India’s derivatives market, said Vivek Sharma, investment head at Estee Advisors Pvt. “To a very large extent SEBI’s objectives have been achieved. Retail investors were losing a lot of money and that was not sustainable.” After a series of warnings, the regulator stepped in to shield retail investors following its study that showed they lost billions on derivatives. The restrictions, introduced in phases, included limiting weekly options and increasing lot sizes. The final set of measures, which come into effect April 1, will require brokers to monitor position limits intraday. 

 

A selloff in India’s small- and mid-cap shares — often seen as a barometer of animal spirits in the stock market — and the

receding footprint of mom-and-pop investors in derivatives has likely diminished the odds of the regulator imposing additional

trading curbs, according to Kotak Securities Ltd.

 

India still remains the world’s top destination for options — more than 120 billion index options contracts changed hands on

the NSE last year, dwarfing the 1 billion contracts traded on the Cboe Global Markets, Inc. Meanwhile, traders are bracing for further disruption as expiry day shift sparks a new round of competition between India’s largest stock exchanges — NSE and BSE Ltd.  The NSE’s surprise decision this month to move its expiry day from Thursday to Monday, closer to BSE’s Tuesday expiry, has sparked concerns of a further hit to market volumes. Reflecting the diminishing prospects for derivatives, BSE’s shares have nosedived 35 per cent from this year’s peak.

 

“This may lead to a 10 per cent-20 per cent impact on industry premiums and impact on BSE’s premiums may be higher at 20-30 per cent,” Jefferies Financial Group Inc.’s analyst Prakhar Sharma wrote in a note.