F&O Market: The real issues and the socioeconomic benefits questioned

The Securities and Exchange Board of India (Sebi) last week issued a damning preliminary order against Jane Street, a New York-based trading firm, accusing it of orchestrating large, synchronised trades across the cash, futures, and options markets to manipulate equity-index levels. The trades allegedly profited Jane Street handsomely while inflicting losses on India’s ever hopeful retail investors. In righteous indignation, Sebi declared that “the integrity of the market and the faith of millions of small investors ... can no longer be held hostage to the machinations of such an untrustworthy actor”. Sebi has banned Jane Street from India’s securities markets and impounded ₹4,843 crore as alleged unlawful gain. We will watch with interest how the case progresses. The Indian judicial system has allowed “untrustworthy actors” to escape due punishment. But what does the episode reveal about India’s derivatives market itself? Popular reformist responses to the Jane Street saga are both predictable and misdirected. Suggestions include beefing up surveillance, raising margin requirements, curbing expiry-day trades, and educating retail investors about the risks of options trading. Foreign and domestic traders should be treated equitably in tax matters. All sensible — but peripheral. 

Cui bono? 

Asking, as Romans would in a similar situation, Cui bono (who gained an advantage which can help to identify suspects or motives), the answer becomes clearer. Remember we have been here before. Sebi’s own study from 2023 laid bare a sobering statistic: Over 90 per cent of individual traders lost money trading futures and options in FY22. The regulatory response? Popup warnings on trading platforms — a useless daily irritation while logging in. I had mentioned then, nothing will really change for investors because whether traders win or lose, one group always gains: The rent collectors of the stock-market system, who also happen to be the rule makers. The answer to Cui bono is in plain sight, not even hiding. According to Sebi’s 2023 analysis, in FY22, over and above the net trading losses incurred, losers in the group of active traders were out of pocket by an additional 28 per cent of net trading losses as transaction costs. Even active traders making trading profits incurred 50 per cent of such profits as transaction costs! Transaction costs for traders are in turn revenues for three entities. This trinity — the state, exchange, and regulator — feeds off the steady churn of hopeful punters in the derivatives market. The incentives for meaningful reform are misaligned at best.   

The central government: Securities transaction tax (STT) revenue has exploded, from just ₹6,426 crore in FY15 to an estimated ₹55,000 crore in FY25. More than 40 per cent of this likely stems from futures & options (F&O) trading. That’s compound annual growth of 24 per cent! Whether a Jane Street games the system or not, or whether 90 per cent of F&O traders lose money or not, the government has been the biggest beneficiary of the F&O segment. 

The exchanges: Derivatives are also the golden goose for the Indian exchanges, with almost all the money going to the National Stock Exchange (NSE) due to its near-monopoly status. The NSE began offering colocation service to high-frequency traders in 2009 and now rakes in colossal revenue from derivatives — estimated at ₹15,000 crore-16,000 crore in FY25, accounting for 90 per cent of its income. Its March quarter net profit jumped 47 per cent; its dividend an eye-watering 3,500 per cent. Operating margins stand at a near-cartelistic 78 per cent. In 2015, the NSE was racked by a colocation scam and in 2025 it had to be goaded into sending a warning letter to Jane Street by Sebi. This is no surprise: The NSE has every incentive to expand the game, not regulate it. It has even less of a motivation than the Ministry of Finance to cut down on F&O. 

Sebi: Even the regulator has a stake in the status quo. In FY24, Sebi earned ₹1,851 crore as regulatory fees and subscriptions. Of this, ₹1,066 crore came from turnover-based fees  — driven largely by the F&O segment, which accounts for roughly 90 per cent of the trading turnover. 

So, the real problem statement is … 

Venture capitalists often ask startup founders for a crisp “problem statement” or “what is the problem you are going to solve?” What is the problem statement then in the F&O market? It is not how to prevent Jane Street type of market manipulation, or how to “protect” innocent traders from losing money. It simply is: What is the socioeconomic benefit we are deriving from the current derivatives market? Sebi claims that F&O enables efficient price discovery and improved market liquidity, and permits investors to manage risk. I humbly state that it does not do any of these. The cash market runs parallel to the F&O market and hence does not aid in price discovery or liquidity, and only a small number of investors use F&O for hedging. The rest is socially harmful speculative froth. In July 2023, stock derivatives volumes were 422 times those of the underlying cash market. In F&O, India has created a standalone, highly speculative market which has catapulted India to the top of the global league tables: The NSE is now the world’s largest derivatives exchange by volume; in early 2024, perhaps 84 per cent of all global derivatives trading was occurring in India. That’s a peculiar badge of honour for a poor country where 800 million or 57 per cent of the citizens receive government food ration every month. One might forgive sceptics for wondering if India has built the world’s most energetic trading sector in the name of financial development. Until India honestly confronts the question of who benefits from its frenzied F&O market, the answer to what to fix will remain elusive. For now, the wheel spins on. 

 

The author is editor of www.moneylife.in and a trustee of the Moneylife Foundation; @Moneylifers