Efforts by the Securities and Exchange Board of India (Sebi) to discourage retail investors from taking part in speculative futures and options (F&O) trading are taking shape now.
According to a Kotak Institutional Equities report, with many of the new retail-focused F&O regulations now in effect, retail premium turnover and the number of active retail traders in F&O have dropped by about 20 per cent. “Retail premium traded in Jan-Feb has likely declined by ~20 per cent as compared to the pre-regulation average level (Apr-Oct),” the report said.
In a move to curb speculative trading, protect retail investors, and improve market stability, Sebi had introduced a set of six reforms in the F&O framework. Kotak found that the impact of the regulations is more pronounced among smaller retail investors. Retail participation from investors trading under Rs 10 lakh has fallen more sharply by 25 per cent, while those trading higher amounts have seen a smaller drop of 7 per cent.
In October 2024, around 397 million retail options contracts were traded on the NSE, but this number has shrunk to just 68 million by February 2025. Retail options premium saw a decline from a peak of Rs 250 billion in June 2024 to Rs 151 billion in February 2025.
Cash market activity has also slowed down in recent months from elevated levels in June and July 2024. Retail cash average daily volume (ADV) has now declined to nearly Rs 300 billion from the peak of around Rs 500 billion, even as these levels are still higher than previous years, the report said.
Cash delivery volumes has also come down from the peak levels hit in July 2024, nearly more than halving by February 2025. Lastly, the margin funding book also reflects the weak retail sentiment, even as the decline is less pronounced as compared to trading volumes, Kotak Institutional Equities said in its report.
Non-Retail Participants Impacted
The decline in premium is larger for non-retail (mostly proprietary) traders, around 25 per cent. The drop in contracts has been similar for both retail and non-retail participants, about 80 per cent. For proprietary and institutional traders, the bigger decline in volumes is likely due to higher margin requirements on expiry day positions from November, the report said.
Sebi had last month proposed linking market-wide position limits for single-stock derivatives to the cash market. The proposed limit would be set at the lower of 15 per cent of a stock’s free-float market capitalisation, or 60 times the average daily delivery value. This aims to reduce potential manipulation and better align derivative risks with the liquidity in the cash market. These proposals are still in the consultation phase. Sebi’s ongoing proposals to limit index positions could further reduce institutional volumes if they are implemented, the brokerage firm noted.
Sebi’s Regulations To Curb Speculative Trading By Retail Traders
Here’s a brief overview of the regulations:
Recalibration of Contract Size for Index Derivatives: Minimum contract size for index derivatives has been increased to Rs 15 lakh, effective November 20, 2024.
Upfront Collection of Options Premium: Trading members need to collect options premium upfront from buyers, starting February 1, 2025.
Rationalisation of Weekly Expiring Derivatives Products: Only one benchmark index per exchange will offer weekly expiring derivatives, effective November 20, 2024.
Intra-Day Monitoring of Position Limits: Sebi will monitor position limits intra-day, not just end-of-day, starting April 1, 2025.
Removal of ‘Calendar Spread’ Treatment on Expiry Day: Calendar spread benefits will not be available on expiry day, effective February 1, 2025.
Increase in ‘Tail Risk’ Coverage on Expiry Day: An additional ‘Extreme Loss Margin’ of 2 per cent will be levied on short options contracts on expiry day.
These regulations were aimed at addressing the growing concerns of retail investors losing money in the derivatives market. According to a recent study by Sebi, retail traders collectively lost a massive Rs 1.81 lakh crore in F&O from March 2021-2024.
The increasing number of retail traders in F&O also caught Sebi’s attention. In just two years, the number of retail traders on Dalal Street almost doubled, growing from 5.1 million in FY22 to 9.6 million in FY24. This surge sparked concerns that household savings are being diverted from productive investments into risky, speculative F&O trades. Sebi’s new rules were aimed at mitigating these risks and promote more responsible investing.
