Short-term F&Os denting capital formation: Sebi's Ananth Narayan G

Regulator mulling steps to push long-dated derivatives contracts, boost cash market turnover

The stock market regulator is considering fresh measures to boost India’s cash market turnover and curb the dominance of speculative short-term products in the domestic equity derivatives market that pose a threat to capital formation in the country, whole-time member of the Securities Exchange Board of India (Sebi) Ananth Narayan G said on Thursday.

 

Sebi is also looking at steps to extend the tenure and maturity of equity derivatives to mitigate short-term contracts. While Narayan acknowledged that derivatives are vital for price discovery, hedging and market depth, he flagged certain trends in the ecosystem have warranted a closer look by the regulator.

 

“Unlike longer term derivatives, short-term derivative products such as expiry day trading in index options may detract from capital formation,” he noted at the CII Markets Conclave.

 

Citing the staggering losses faced by retail investors in the futures and options (F&O) trading segment, Narayan G noted that this “large sum of money could have otherwise gone towards responsible investing and capital formation”.  The current structure “is not sustainable for any stakeholder,” he averred. 

 

The Sebi member’s comments assume significance in the backdrop of several measures already taken by the market regulator to limit what was seen as a frenzy in the futures and options (F&O) segment.

 

The tightening of the derivatives trading rules since November 2024, that include limiting the number of weekly index expiries and pushing volumes to monthly contracts, have hit volumes on the indices of both the exchanges, and in turn, the revenues of stock brokers. Some of these measures have been triggered by high frequency trading firms known to take aggressive bets on the market. 

 

“We recognise the potential concerns of market infrastructure institutions, brokers, and other intermediaries, whose revenues may depend heavily on these short-term derivative volumes. But we must ask ourselves collectively, is all this at all sustainable?” asked Narayan.

 

The turnover in index options is often 350 times or more the turnover in the underlying cash market, creating an imbalance, noted Narayan. Expiry day option trading increases market volatility and could lead to noise trading that may potentially undermine confidence in price formation, he pointed out.  

 

A recent Sebi study had revealed that nine out of every 10 individual traders in the F&O segment ended 2024-25 with losses totalling ₹1.01 trillion.

 

The market regulator has also initiated a comprehensive survey of investors’ risk awareness, covering 90,000 households. Based on the findings, Sebi will be designing a large-scale targeted outreach program in different languages.

 

Narayan also addressed rising digital frauds, and conveyed that Sebi is collaborating with exchanges and mutual fund bodies for an outreach program to address issues of ‘fly-by-night’ unregistered ‘fraudsters hoodwinking savers with promises of assured high returns’.