Retail investors were at it. The average daily turnover (ADT) of futures and options (F&O) increased 34.5 times from FY19-24, while cash volumes only doubled, prompting deep concern from the Sebi chairman. Brokers now expect more restrictions to curb the frenzy:
What is the F&O segment?
NSE and BSE offer segments for investing and trading, such as capital markets, stock futures and options, currencies, commodities, etc. Market participants can buy and sell shares on the capital markets or cash segment and hedge or simply throw on the derivative segment that derives. its value of the underlying stocks or indices on the cash segment. A participant must put the entire amount to buy and sell shares, but only a fraction to trade on the F&O segment. Relatively cheap index options, based on Nifty and Bank Nifty, have become very popular among retail investors in the last three years.
What is the concern about F&O business?
The rise in option volumes despite huge losses faced by retail investors has the Securities and Exchange Board of India (Sebi) worried. Its research shows that nine out of 10 investors lose money trading options, and the average loss is ₹50,000. Despite this, the ADT of F&O, mostly options, on NSE and BSE increased manifold from FY19-FY24 (Apr-Nov) against a modest gain in cash volume. The craze was fueled by weekly index options with expiration every day of the week. Retail lacks the expertise and tools to trade, unlike better informed proprietary traders who use algorithms to trade.
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What barriers could be placed on pitching?
While participation cannot be limited, margins for trading can be raised and minimum net worth criteria set for F&O. Currently, an option buyer pays a fraction of what a prospective buyer pays. For example, a weekly 19,900 call option contract costs only ₹872, against over a lakh for a Nifty futures contract. Higher margins could result in buyers shelling out more.
Are there any restrictions at the moment?
Risk disclosures only. A customer logging into their trading account with a broker cannot proceed without checking a pop-up box with Sebi-mandated risk disclosures. These state that 9 out of 10 individual traders in the stock futures and options segment made net losses. On average, net losses are close to ₹50,000. On top of this, loss makers spent an additional 28% of net trading losses as transaction costs. Those making net trading profits received between 15% and 50% of such profits as transaction costs.
Did these risk disclosures help?
Bypassing the spike in F&O turnover they have not. Data shows that the notional turnover (market value) of F&O in FY24, so far, has exceeded the turnover of the last fiscal. In the eight months of the current fiscal year (April-November) it is total ₹45,452 trillion, up 19% from FY23 ₹38.223 trillion. The turnover of index options constitutes 98.5% of the total. The turnover actually increased over the past two fiscals, which coincided with the nationwide Covid-induced lockdown, which also saw the Nifty rise 12% to 19,812.
(tagsTo Translate)F&O