The Securities and Exchange Board of India (SEBI) has unveiled a consultation paper on July 30, 2024, titled “Measures to Strengthen Index Derivatives Framework for Increased Investor Protection and Market Stability.” This initiative aims to curb the rising trend of speculative trading in Futures and Options (F&O) contracts, which has increasingly been adopted by retail investors.
Historically, F&O trading was introduced to help investors manage risk. However, recent trends have raised concerns among market regulators and government officials about the growing prevalence of speculative bets on individual stocks. These contracts allow investors to wager on stock price movements without owning the underlying shares, which has led to substantial losses for many retail investors.
Current Landscape of F&O Trading
Recent data highlights a dramatic rise in F&O trading volumes. According to a SEBI report from January 2023, trading volumes surged from ₹7 lakh in 2019 to ₹45 lakh in FY 22. By May 2024, the aggregate turnover in the equity derivatives segments of the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE) had reached ₹9,504 lakh crore.
Further analysis reveals a troubling trend: between FY 19 and FY 22, approximately 90% of individual traders in the equity F&O segment incurred losses, averaging ₹1.1 lakh in FY 22 alone. SEBI’s consultation paper, released in July 2024, underscores the speculative nature of recent trading practices, such as last-minute buying on expiring contracts, which are not aligned with long-term investment strategies.
Proposed Regulatory Changes
SEBI’s new rules aim to refine the eligibility criteria for stocks in F&O trading to enhance market stability and investor protection. The key changes proposed are:
Eligibility Criteria: Only companies ranked among the top 500 in market capitalization and daily trading activity will be eligible for F&O contracts.
Liquidity Requirements: Stocks must demonstrate significant liquidity by meeting higher minimum daily trading volumes and order sizes.
Betting Limits: A cap of ₹1,500 crore on the amount of money that can be bet on any single stock through F&O contracts is proposed.
Order Size Variability: The minimum acceptable level for order size variability will be raised to ₹75 lakh.
Daily Trading Threshold: Stocks must have daily trading worth at least ₹35 crore to qualify for F&O trading.
Additionally, SEBI proposes criteria for the removal of stocks from F&O trading if they become inactive:
Liquidity and Activity: Stocks with low cash market trading activity and liquidity will be delisted from F&O trading.
Active Trading Requirement: Stocks must have at least 15% of active traders or 200 members, whichever is lower.
Turnover and Open Interest: The stock’s daily trading turnover must be at least ₹75 crore, and its notional open interest should be at least ₹500 crore.
Stocks must meet these criteria after being listed in the F&O segment for a minimum of six months to avoid automatic removal.
Impact on Investors
The proposed changes are designed to protect investors and stabilize the F&O market by addressing speculative trading:
Reduction in Speculation: By enforcing stricter eligibility and liquidity requirements, SEBI aims to curtail speculative bets, encouraging investors to adopt more strategic, long-term approaches.
Enhanced Liquidity: Improved liquidity through the removal of less actively traded stocks is expected to make the F&O segment more reliable and less susceptible to market manipulation. This should facilitate smoother entry and exit for investors.
Overall, SEBI’s proposed measures represent a significant shift in the regulatory framework for F&O trading, aiming to foster a more stable and investor-friendly market environment.
Related topic:
What is BSE Futures and Options? [Revealed]