(Bloomberg) -- India’s securities regulator introduced a slew of steps to limit equity derivatives trading, attempting to shield retail investors whose appetite for the products fueled their rise in the nation.
The measures from the Securities and Exchange Board of India erect hurdles for short-term speculative bets, such as limiting index option contracts with weekly expiries, according to the details on its website released Tuesday.
The regulator is following through on the proposals it had laid out in July, born of concerns that the surge in India’s equity derivatives to unprecedented levels — and higher than any other country — hinders efforts to channel household savings for productive uses. Turnover has surged over 40-fold since 2019, reaching a record $6 trillion in February, larger than the size of the economy.
The hoped-for result would be the cooling of a market rife with mom-and-pop investors with limited information. Brokerage firms whose earnings have bloomed on equity market strengths — a good chunk of it from derivatives — may face more uncertainties if investors roll back on speculative trading.
“We’re building in a 30% decline in overall option volumes,” said Abhilash Pagaria, quantitative strategist at Nuvama Wealth Management. “The overhang is largely behind and most estimates are building this in.”
The rules may also threaten profits at high-frequency trading firms, just as they started expanding in the country’s $5 trillion stock market. Optiver BV, Citadel Securities LLP and Jump Trading are among those that have grown their presence in recent years. Algorithms helped foreign investors and proprietary trading desks pocket $7 billion in gross profits from trading futures and options in the financial year ended in March.
The measures mark the most sweeping intervention since the Covid-19 pandemic, when the securities regulator sought to curb excessive short-selling during a market crash. They come into effect in phases, starting Nov. 20, with full implementation by April 1.
One of the most significant changes involves limiting weekly options. The regulator blamed these products — first introduced in 2019 by the National Stock Exchange of India Ltd. — for the “hyperactive trading” and “increased volatility” seen on expiry days.
Among the other measures introduced in the regulator’s circular:
- Upfront collection of options premium
- Requiring exchanges to allow weekly contracts — options that expire in a week — for only one of its benchmark indexes
- Raising the minimum contract size to at least 1.5 million rupees
- Imposing an additional 2% extraordinary loss margin on all short-options contracts during expiry
- Removal of “calendar spread” treatment on options’ expiration day
“We are now getting into a mature stage as a market where the regulator has also realized that there was a mistake in introducing weekly products, which they have now fixed,” said Tejas Shah, head of derivatives at Equirus Securities Pvt. “These measures will bring stability to the derivatives market and improve the long-term structure.”
Retail Traders
The limits are aimed at shielding retail traders. Late last month, SEBI released a study showing that 93% of them lost money in the segment over the three-year period ended March. Such investors account for over one-third of the options market, a space typically dominated by high-frequency traders.
In 2023, local investors traded 85 billion of the contracts, more than in any other country. India’s derivatives market grabbed global attention in April after US-based Jane Street Group revealed that a strategy used in the country generated $1 billion in profits last year.
In releasing the proposals in July, SEBI Chairperson Madhabi Puri Buch told reporters that the surge in options has become a “macro issue.” With the regulator’s warnings in the backdrop, the volume of contracts has lowered since the February record of about $6 trillion.
--With assistance from Menaka Doshi.
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