A losing proposition

New studies released last week by the Securities and Exchange Board of India (Sebi) showed that retail participation in the equity derivatives segment dipped for the first time in a decade in 2025-26 (FY26). The number of unique investors contracted about 18 per cent to 8.75 million, with a more pronounced 37 per cent drop in small retail traders with an annual turnover below ₹10,000. The number of first-time entrants also came down sharply, while many traders active in the previous financial year stopped trading in FY26. All this is important because retail traders tend to lose in the equity derivatives segment. The aggregate net loss declined to ₹91,685 crore in FY26 as against ₹1.12 trillion in the previous year. However, the average loss per trader increased by about 2 per cent to ₹1.17 lakh. 

In other words, Indian households at the net level lost more than ₹2 trillion in the equity derivatives segment of the stock market over the past two years. On the other side of such trades, proprietary traders, mutual funds, and foreign portfolio investors (FPIs) gained. As the study underscores, 99 per cent of the profits made by FPIs and proprietary traders were through “Algo entities”. Large traders and fund houses have access to sophisticated algorithms to execute trades, and it is reasonable to argue that small retail traders don’t stand a chance in the game. Derivatives are used to hedge an underlying portfolio, but traders also use them for speculation, which helps generate volumes and leads to better price discovery. The experience of Indian retail traders is in line with global markets. Sebi has taken several steps over the years to contain retail participation in this segment, such as increasing the contract size for index derivatives and upfront collection of options premium from buyers. 

Given the latest studies and global experience, it can be tempting to argue that retail traders must be banned from this segment. But a ban is a blunt instrument and must be avoided. It is possible that large individual investors may genuinely need an exposure to derivatives to hedge.  Further, the data put out by Sebi suggests that a more nuanced approach is needed. Most derivatives traders have an annual income of less than ₹5 lakh, and also account for the largest chunk of aggregate losers. It is also worth noting that trading in derivatives has spread even to small towns. Notably, 35 per cent of the traders at the end of March 2026 had no underlying equity portfolio, while another 37 per cent had a portfolio worth less than ₹50,000. Only about 5 per cent of the traders had underlying stocks worth over ₹10 lakh. Also, people under 30 years of age made up over 40 per cent of the traders.  

All this suggests that individuals are entering the segment to make quick money, without perhaps understanding the unpredictable nature of the stock market, especially the futures and options game. The numbers bear this out — nearly nine of 10 individual traders incurred losses with about 92 per cent of their aggregate losses arising from options trading in FY26. It is possible that they have been attracted to the market by financial influencers or are being misled by brokerages. The issue is worth studying. As the data shows, over FY22-26, the cumulative transaction costs were about ₹1 trillion. Brokerages accounted for about half of it. Thus, these firms have made a lot of money at the cost of retail traders. Many of them also have proprietary trading desks, and it is no coincidence that such proprietary traders persistently log the highest gross trading profit in derivatives. India’s equity cult has surely expanded in recent years, but retail investors’ susceptibility to greed, fear and inadequately informed decisions persists. Thus, what is perhaps needed is sensitising individual investors and possibly curbing the exposure to derivatives based on the underlying equity portfolio. These are not neat solutions, but they are worth debating.