Stock exchanges and brokers serving retail traders could face significant challenges due to proposed regulatory changes by the Securities and Exchange Board of India (Sebi) for Futures & Options (F&O) trading. According to reports, market volumes may drop by 30-40 per cent if the measures are enacted.
The proposed changes include increasing the minimum contract size, collecting option premiums upfront, monitoring position limits intra-day, rationalising strike prices, removing the calendar spread benefit on expiry day, and increasing margins for near-expiry contracts. Sebi stated that these measures aim to enhance investor protection and promote market stability.
A Jefferies report indicates that reducing the number of weekly option contracts from 18 to 6 could impact around 35 per cent of industry premiums. However, if trading shifts to the remaining contracts, the overall impact might be reduced to 20-25 per cent.
IIFL Securities predicts that the withdrawal of weekly options will have the most significant effect, particularly on the National Stock Exchange (NSE), where index options account for 98 per cent of trading volumes. IIFL estimates that NSE's earnings could drop by 25-30 per cent by the financial year 2026, while the Bombay Stock Exchange (BSE) could see a reduction of 15-18 per cent.
Jefferies also anticipates that the removal of the Bankex weekly contract could decrease BSE's earnings per share (EPS) by 7-9 per cent over FY25-27. However, if trading activity shifts to remaining products, the impact on BSE might be mitigated or even lead to earnings growth.
The report also notes that discount brokers, heavily reliant on retail investors, are expected to be more affected than traditional full-service brokers. In contrast, clearing members like Nuvama, which cater to institutional investors and high-frequency traders, are likely to experience less impact.
Sebi’s proposed measure to increase lot sizes by 3-4 times over six months could lead to higher costs for retail traders, potentially reducing their market participation. The proposed margin increase for near-expiry options could also diminish leverage and profitability, particularly for retail traders with limited funds.
Sebi Chief Madhabi Puri Buch recently highlighted that households are losing up to Rs 60,000 crore annually in the F&O segment. The Union Budget has also raised the securities transaction tax (STT) on futures and options trades starting October 1 to address concerns about excessive speculation.
The Economic Survey earlier flagged concerns over the rising interest of retail investors in derivatives, suggesting that speculative trading may not be suitable for a developing country and is driven by gambling instincts.
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