Trading activity by individuals in equity derivatives stays high; Sebi re-examining
Retail Trading in Equity Derivatives: SEBI’s Regulatory Push
Retail participation in India’s equity derivatives market has surged in recent years. This increase has brought more market liquidity, but also significant risks. Speculative trading has led to substantial losses for individual investors. The Securities and Exchange Board of India (SEBI) is now reassessing its regulatory framework to limit excessive risk-taking and enhance investor protection.
Rising Losses in Retail Trading
Between 2021 and 2024, retail traders lost over ₹1.8 trillion (around $21.67 billion) in the equity derivatives market. Most retail traders failed to profit, with 91.1% reporting losses in FY24. Meanwhile, institutional and foreign investors achieved profits. This disparity highlights the speculative nature of many retail trades, driven by high leverage and poor risk management.
SEBI’s Measures to Regulate Retail Derivatives Trading
To address these concerns, SEBI has introduced several regulatory measures to stabilize the market and protect individual investors.
- Higher Contract Sizes
SEBI has raised the minimum contract size for index derivatives from ₹5–10 lakh to ₹15–20 lakh. This change ensures that participants have enough financial capacity to manage risks. - Upfront Premium Collection
Starting in February 2025, brokers must collect the full option premium upfront. This measure discourages excessive intraday leverage and forces traders to consider their exposure before entering trades. - Rationalization of Weekly Expiry Contracts
SEBI will allow weekly expiry contracts only for one benchmark index, starting in November 2024. This move reduces speculation linked to multiple expiry dates. - Extreme Loss Margin (ELM)
A 2% margin will apply to short options contracts on expiry days. This additional margin helps mitigate risks arising from sudden price movements. - Real-Time Monitoring of Position Limits
From April 2025, stock exchanges will monitor position limits during the trading day. This real-time surveillance helps prevent traders from taking on excessive positions that could destabilize the market. - Banning Calendar Spreads on Expiry Days
SEBI will ban calendar spreads on expiry days from February 2025. This action reduces the basis risk traders face on those days.
Looking Ahead: Linking Derivatives Exposure to Financial Capacity
SEBI is considering linking retail exposure limits to an investor’s income and net worth. Brokers would report clients’ financial details, allowing exchanges to assess risks more effectively. This could prevent individuals with limited financial resources from overexposing themselves to risky trades.
While some traders worry that these regulations could increase costs or limit flexibility, SEBI argues that they will help safeguard retail investors and stabilize the market. The goal is to create a sustainable trading environment where investors can participate without excessive risk.
The Broader Impact on the Market
Though aimed at retail traders, these changes will impact brokers, institutional investors, and trading platforms. As retail participation remains high, SEBI must balance market accessibility with investor protection. These regulations aim to create a healthier financial ecosystem, where individuals can trade responsibly.
In conclusion, SEBI’s measures will reduce speculation and protect retail traders from unnecessary risks. Once fully implemented, these steps will promote a stable, transparent market environment, enabling responsible participation in equity derivatives trading.
