SEBI proposes new measures to curb retail participation in options trading, including raising the minimum trading amount, reducing contract expiries, and hiking trading margins.
India, Bollywood Fever: India’s markets regulator, the Securities and Exchange Board of India (SEBI), proposed several measures on Tuesday aimed at curbing a trading frenzy in the options market. The proposals include raising the minimum trading amount by over three times, reducing the number of weekly contract expiries, and increasing trading margins.
These steps follow an increase in tax on derivative transactions announced last week. The objective is to reduce the participation of retail investors in the options market, which traders say will significantly impact trading volumes.
Authorities have been increasingly concerned about speculative trading by retail investors, who have been channeling their savings into India’s booming options market. Data shows that the monthly notional value of derivatives traded reached a global high of 9,504 trillion rupees in May. Retail investor participation in derivative trading volumes has surged to 41% so far in 2024, up from just 2% in 2018.
SEBI Chairperson Madhabi Puri Buch stated that until last year, the growing interest in options trading was seen primarily as an investor protection issue, but it has now become a macroeconomic concern.
Large positions in index options and “hyperactive and abnormal trading” close to the day of expiry have implications for market stability, SEBI noted.
The proposed measures include:
- Raising the minimum trading size of new options to 1.5 million to 2 million rupees ($18,000-$24,000) from the current 500,000 rupees. This size will increase to 3 million rupees after six months.
- Limiting exchanges to offering options on a single benchmark index each week. Currently, India’s two leading exchanges offer multiple option contracts weekly, resulting in nearly daily expiries.
- Increasing margins on near-term expiries and requiring brokerages to collect premiums upfront.
SEBI has invited feedback on these proposals by August 20 before issuing final rules.
Amit Kumar Gupta, founder of Fintrekk Capital, described the changes as “massive” and predicted they would reduce retail volumes in options trading and affect high-frequency and algorithmic traders, as well as exchanges.
Rajesh Baheti, managing director at trading firm Crosseas Capital Services, suggested that increasing the contract size is the most practical solution to prevent retail investors from trading options. “SEBI should begin with only the lot size change which will curb retail entry. The securities transaction tax rise will also affect volumes. Other changes can be kept in abeyance and SEBI should implement changes one variable at a time,” Baheti said.
The measures are part of SEBI’s broader efforts to stabilize the market and protect retail investors from excessive risk.
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