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Two decades ago, Warren Buffett warned that derivatives are time bombs for both parties involved and the economic system. SEBI data has once again proven the “God of stocks” right.
In FY24, 92.50 lakh individuals and proprietorship firms traded in the index derivatives segment of NSE, incurring a massive trading loss of Rs 51,689 crore. SEBI data reveals that out of these 92.5 lakh traders, 85% or 78.28 lakh faced losses. SEBI chief Madhabi Puri Buch highlighted the magnitude of this issue, calling it a “macro issue” during an event on Tuesday. “At Rs 50,000-60,000 crore, that’s pretty macro according to me; this is not about some Rs 200-600 crore,” Buch said.
The loss could be even higher when factoring in transaction costs. SEBI’s study found that loss makers spent an additional 23% of their trading losses on transaction costs, while profit makers spent an additional 15% of their trading profits on transaction costs during FY22.
“Considering transaction costs, the FY24 outcome will likely mirror the FY22 study, where 9 out of 10 traders lost money. On the other hand, larger non-individual players, such as high-frequency algo-based proprietary traders and Foreign Portfolio Investors (FPIs), generally made offsetting profits,” SEBI noted.
The Rs 51,689 crore loss represents over 32% of net inflows into growth and equity-oriented mutual fund schemes during FY24. It also accounts for over 25% of the average annual inflows into all mutual fund schemes over the past five years.
To defuse this derivative time bomb, SEBI plans to implement seven measures, including limiting weekly options to one per stock exchange, increasing contract sizes by 2-3 times, and hiking margin requirements.
IIFL Securities estimates that these measures could impact 30-40% of market volumes. “Restricting weekly options to one contract per exchange is likely to significantly affect market volumes. Increasing the contract size by 2-3 times initially (and 3-4 times after six months) would impact retail participation and reduce the number of active investors. Other measures such as rationalizing strike prices, increasing ELM, and restricting calendar spread margin benefits on expiry day contracts should also soften volumes,” IIFL said.
Market insiders recall that in 2014, Korea implemented similar measures due to similar concerns. “However, the market there never recovered despite numerous attempts by regulators to revive business activity. Even ten years later, volumes are lower than in 2014. Therefore, it is crucial for SEBI to implement changes gradually to avoid negatively impacting the market’s vibrancy,” said B K Sabharwal, Chair of the Capital Market & Commodity Market Committee at PHDCCI.
