Many amateur traders are exposing themselves to the risks of futures and options (F&O) trading, driven by the influence of financial content creators on various social media platforms. While they are enticed by the promise of early gains, many later suffer significant losses, often falling into a cycle of debt and trading addiction. Several factors contribute to this trend, including increased smartphone penetration, wider internet access, and the allure of quick profits. According to recent estimates, retail investors have been losing around Rs 50,000 crore annually due to speculative trading.
In the light of this development, the market regulator is expected to introduce stricter derivative norms aimed at curbing speculative trading. Based on feedback from the industry, the Securities and Exchange Board of India (SEBI) is likely to implement seven measures proposed in its July consultation paper, with minor modifications. SEBI is currently considering key suggestions from industry participants ahead of its upcoming board meeting. If fully implemented, the new regulations are expected to reduce market volumes by 30-40% and impact the earnings of domestic stock exchanges by 15-30%, according to initial estimates. Discount brokers have seen strong growth in recent years.
READ | GST Council may step in to diffuse centre-state tension
What is F&O trading
Futures and options are two primary types of derivative trading in the stock market. These contracts allow parties to agree on the price of a stock or asset for future delivery. By locking in prices in advance, traders can hedge against market risks associated with stock trading.
Futures and options derive their value from underlying assets such as stocks, indices, commodities, or ETFs. These instruments provide a way to manage future risk by setting prices beforehand. However, predicting price movements is inherently uncertain, and inaccurate predictions can lead to either substantial profits or losses. Therefore, only those with a deep understanding of stock market operations should engage in such trades.
Unfortunately, this has not been the case in India. F&O trading has become the preferred method for many investors. According to an ICICI Direct brokerage report, India’s monthly futures and options turnover reached a record $1.1 trillion in March 2024, a significant increase from $27 billion in March 2019. This surge indicates that derivatives trading now surpasses traditional stock trading in daily transactions.
Approximately 89% of individual traders reported losses, with an average loss of ₹1.1 lakh. Among active traders, 90% experienced losses, with an average loss of ₹1.25 lakh. The average loss for a losing trader was more than 15 times the average profit of a successful one.
History shows that when financial speculation becomes a mass-market activity, it rarely ends well for the participants. Therefore, it is crucial for the market regulator to discourage F&O trading among inexperienced investors.
What is SEBI doing about the situation
One of the main issues with F&O trading is that many brokers have undisclosed arrangements with financial influencers, who often mislead retail investors by exaggerating the profitability of stock markets. Social media is flooded with reels and tips that promote the illusion of easy money.
Recognising the gravity of the situation, SEBI, the Reserve Bank of India (RBI), and the ministry of finance are taking steps to control the F&O trading frenzy. One potential change could involve ending the rebate business model, meaning brokers would no longer be able to pocket the difference between the transaction fee charged by exchanges and the fee charged to investors. Currently, brokers collect higher transaction fees from investors than they pay to the stock exchanges. In response, brokers like Zerodha may introduce a brokerage fee for equity delivery investments.
SEBI’s working committee on futures and options has recommended increasing the minimum lot size of derivative contracts from Rs 5 lakh to Rs 20-30 lakh, making F&O trading more expensive. This limit is expected to rise further after six months. Market experts also suggest that SEBI should release data on individual investors’ losses at the end of every month to discourage amateur investors. The ministry of finance may even impose a 30% tax on gains from F&O trading, similar to the tax on cryptocurrency profits.
Another critical area requiring government action is regulating financial influencers. Instead of acting as educators, many influencers have assumed the role of financial advisors, often recommending specific stocks or trades. The goal should be to end the practice of stock brokers covertly funding financial influencers.