Nine out of 10 individual : A study by the Securities and Exchange Board of India (SEBI) shows that in the FY24, nine out of 10 individual traders in the F&O segment of the stock market lost money. That is the sobering revelation. Released on Monday by the market regulator, this alarming statistic has highlighted grave concerns over the rising speculation by retail investors in the derivatives segment of the stock market.
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Some of the key findings of the report by SEBI
SEBI report said that a staggering 91.1% of individual traders in the F&O segment incurred losses during FY24. That is, around 7.3 million retail investors who saw their capitals vanishing while trading in derivatives such as futures and options. This data points to a trend already reported by SEBI in January 2023: a worrisome one, no less. Reportedly, 89% of individual F&O traders had lost money in FY 22. New numbers point only to an increase in the condition over time.
According to SEBI, from FY22 to FY24, about 11.3 million different individual traders have collectively lost Rs 1.81 trillion in the F&O market. Of that sum, Rs 750 billion in losses occurred alone in FY24, which appears to rekindle SEBI’s fears concerning the health of retail investors here.
Nine out of 10 individual Losses vs. Gains: The Stark Reality:
One of the major findings of the SEBI study is that an extremely small minority of individual traders, around 7.2%, were actually netting profit during this three-year period. The saddest part, however is that only 1% of these managed to go on and earn more than ₹1 lakh in net profit after deducting transaction costs. This means that in a broad sense, most of those people who have actually managed to gain something from the F&O markets are still not creating significant profits, but it is only a miniscule elite of high-net-worth individuals that are actually successful in the F&O markets.
One of the most puzzling features of the report is that more than 75% of the trading entities continuing to incur loss in F&O segment continued doing so even after having incurred losses for two consecutive years. Such behaviour betrays a very disturbing trend: many trading entities are ready to incur very heavy financial losses without reviewing or changing their strategy or opting out of such high-risk participation.
Increase in Index Options Trading
SEBI has noticed the surging F&O volumes, with significant jumps in the volumes of index options on the National Stock Exchange. The regulator reported that index options volumes increased nearly 13 times from ₹ 10.8 trillion in FY20 to ₹ 138 trillion in FY24. That has compelled SEBI to be more vigilant about such a high-growth market segment because the regulator gets more worried and concerned about macroeconomic implications as such rampant speculation grows.
The SEBI Chairman said that the derivative trading has emerged as a macro issue for the Indian economy. While the SEBI is concerned that savings from the household segment may be diverted into productive investments which are part of capital formation, the savings are now being diverted to F&O trading activities.
Foreign Investors and Proprietary Traders Relish the Party
As discussed above, although individual retail traders bore the major losses in FY24, the SEBI report said that FPIs and proprietary traders had a good year. The data reported indicated that proprietary traders earned gross profits of ₹330 billion while FPIs recorded ₹280 billion during FY24. This scenario differentiated their fortunes and underlines an asymmetric F&O Market, wherein big players and professional traders with better tools, research, and strategies beat the retail investor.
Rise of Young Traders
A demographic study of the F&O participants in FY24 revealed some interesting trends. It was found that nearly 50% of F&O participants, or half of them, were concentrated in only four Indian states, namely Maharashtra, Gujarat, Uttar Pradesh, and Rajasthan. Maharashtra topped with 1.88 million and accounts for 21.7% of all the individual F&O participants; followed by Gujarat at 1.01 million, or 11.6%; Uttar Pradesh accounted for 930,000, or 10.7%, and Rajasthan accounted for 540,000, or 6.2%.
Participation of younger traders in F&O also surged multifold during FY ’24. With an aim to share margins more equitably between the traded variety, this report indicates that whereas 31% participated in trading when he/ she was below 30 years of age in FY ’23, this number grew to 43% in FY ’24. Increased participation by young traders could be an indicator of growing financial literacy or awareness among this younger generation, but it certainly raises very pertinent concerns pertaining to exposure to apparently high risk investments. Alarmingly, 93% of traders younger than 30 years incurred losses-a figure that is again higher than the overall average loss of 91.1%.
Financial Vulnerability of F&O Traders
The most disturbing finding that results from the report is the financial vulnerability of individual traders in the F&O segment. More than 75% of these traders have had an annual income of less than ₹5 lakh in FY24, meaning most are risking all of their earnings on speculative trades. This is a particularly bad trend, because most retail investors would be risking substantial sums of money without full understanding the costs of such speculation and may not have the financial wherewithal to absorb major losses.
SEBI Plans for Investor Protection
In light of these alarming reports, SEBI has suggested a slew of initiatives to strengthen the regulatory framework for index derivatives trading. The main purpose is to safeguard retail investors from excessive speculation as well as promote greater stability in the market.
1. Increase in Contract Value:
To begin with, SEBI recommends that the contract value should be increased from the current range of ₹5-10 lakh to ₹15-20 lakh for the initial period and then eventually to ₹20-30 lakh after six months. This will make entry threshold higher; only those investors with some financial stability and risk appetite will be able to tread in derivative trading.
2. Higher upfront margin for sellers:
SEBI intends to increase the front margin requirement of sellers of F&O. Increasing the upfront margin that sellers have to deposit before entering into the trade, SEBI hopes that the number of excessive leverage and speculation would be reduced.
3. Minimizing the expiry on a weekly basis
Another very important recommendation is to reduce the number of options expiring on the same week from the existing five per trading exchange to only one. This measure is directed at checking frenetic activity brought about by weekly expiries, which encourages speculative, short-term rather than long-term investment plans.
4. Increased Price Intervals for At-the-Money Options:
SEBI has also suggested increasing the price distance between at-the-money (ATM) and out-of-the-money (OTM) option strikes. OTM options are typically traded by speculative traders as a low-cost, high-reward bet, and increasing the distance would make the option less accessible to speculators, thus limiting speculative trades.
5. Elimination of Calendar Spread Margin Benefit on Expiry Date:
SEBI has mooted the abolition of the margin benefit presently availed by the trader, who enjoys the benefit of holding positions in both the spot and a future contract that is going to expire during the week, a move that would discourage last-minute speculation trades. This is with an objective to check volatility and speculative speculation on expiry days.
6. Position Limit- Intraday Monitoring
SEBI has recommended the surveillance of position limits by exchange for real-time to keep a check that no trader is crossing his position limit in the day so that no trader crosses the risk limits while executing trades and also prevents market manipulations or excessive risk-taking.
7. Collection of Margin Upfront from Option Buyers:
Secondly, SEBI has recommended that broking houses collect margins from option sellers at the beginning of the trading day rather than at the end. That will certainly mean that traders will be with adequate capital to sustain their trades and not default on trades. As such, there will be greater financial discipline.
Conclusion
The SEBI study on F&O trading in FY24 paints an unsettling picture for the Indian retail investor in the derivatives market. It shows that 91.1% of individual traders have faced losses and continue to trade when they have suffered losses for two consecutive days, thus proving to the world that speculative trading is a burning issue. The participation by young, financially vulnerable traders worsens the situation for the regulator.
SEBI has suggested several remedies to check speculative bent and protect the retail investors. To enhance the values of contracts, to increase the margins, and to reduce the numbers of weekly expiries are some of SEBI’s propositions which will, in effect, help to give a steadier and more rational trading environment.
Underlying this, it will be a challenge for the regulators, market participants, and investors to strike a balance between promoting participation in the market and not allowing speculative excesses to undo the potential financial well-being of the retail investor.