India’s derivatives market has seen exponential growth in the last few years. This segment tends to lure investors as one can take a larger exposure with a lower investment—you put just a fraction of the notional value to trade in the futures and options (F&O) segments, which could significantly push profit margins (but also losses). While these products are seen as a pathway to make a quick buck, they also come with their own share of risks, leaving the market regulator worried. At a recent quarterly board meeting, Securities and Exchange Board of India (Sebi) chairperson Madhabi Puri Buch expressed concern about retail investors participating in equity derivatives trading, saying it was the regulator’s responsibility to caution investors, adding that Sebi was not worried about systemic risks.

What’s going on?

The derivatives trading volumes in India have overtaken the cash market volumes by a huge margin, all within the last five years. Investors across the world show great proclivity towards derivatives markets, but India’s ratio of derivatives volumes to its cash market volumes is astounding, indicating unbounded excitement. As many as 41.4 billion contracts were traded on the National Stock Exchange’s equity derivatives segment in H1 FY24, close to the record 41.76 billion traded in the entire FY23.



Also read: Mint Primer: When the tail wags the dog: Futures & options

The trade leaderboard

Retail investors currently have over a one-fourth share in turnover in equity derivatives—with nearly 35% in index options, followed by 31% each in index futures and stock options. But proprietary traders (brokers trading with their own money rather than clients’) remain the biggest investors, and their share has been consistently rising. More sophisticated investors such as foreign institutional investors have also been tightening their grip over derivatives.



Fraught with risk

However, dabbling in derivatives can prove risky as it can easily turn into a weapon of mass destruction. Many individuals lack the expertise to deal with this segment. A Sebi study in January has earlier pointed out that nine out of 10 investors lose money in F&O trading, and senior citizens suffer the most.



“The sustained interest in F&O trading, despite significant losses and regulatory warnings, underscores the allure of market rallies and zero-day options (a one-day bet),” said Satish Menon, executive director, Geojit Financial Services. “While this trend may persist, the Sebi report’s revelation should act as a collective wake-up call. Derivatives trading demands in-depth knowledge of products and risks; blindly entering this arena leads to inevitable losses.”


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