Business

IIE DIGITAL DESK: Retail investor participation in India’s equity derivatives market has surged to unprecedented levels, prompting the Securities and Exchange Board of India (Sebi) to initiate a fresh review of trading activity in this high-risk segment. According to data from exchanges and brokers, individual traders continue to dominate volumes in index and stock options, raising red flags about potential financial vulnerability and systemic risks.

Sebi, India’s capital markets regulator, has long expressed concern over the rising number of retail investors entering the complex world of derivatives, often without fully understanding the risks involved. Despite several awareness campaigns and earlier regulatory steps, the allure of quick profits through intraday and short-term options trading has only grown—especially among younger investors and those influenced by social media influencers and trading apps.

In a recent interaction with the media, Sebi Chairperson Madhabi Puri Buch confirmed that the regulator is re-examining the data and evaluating whether further measures are necessary to curb risky behavior in the derivatives space. “We are closely observing participation trends. While the markets remain fair and orderly, our duty is to ensure that investor protection remains paramount,” Buch said.

Derivatives, particularly index options, are structured for hedging and risk management. However, data shows they are increasingly being used by individuals purely for speculative purposes. According to NSE data, nearly 80–85% of derivatives trading volume now comes from retail investors, with a sharp rise in single-day positions that are squared off by market close. A majority of these trades result in losses, especially in the volatile weekly expiry sessions.

In January 2024, Sebi had released a discussion paper highlighting that 90% of individual traders in the F&O segment incurred net losses, with an average loss of ₹1.1 lakh per person during the previous financial year. The regulator has since implemented stricter margin norms and urged brokers to disclose risk profiles more transparently. However, the latest trends suggest that trading activity among individuals remains unabated.

Experts believe that the easy accessibility of trading platforms, low entry costs, and the availability of leverage continue to fuel the frenzy. "Retail investors are often lured by the success stories shared on YouTube and Telegram channels. The reality is that derivatives are not suitable for most of them, especially without a clear strategy or stop-loss discipline," said Deven Mehta, a Mumbai-based financial advisor.

The regulator is reportedly considering a new round of interventions, including possible limits on retail exposure to leveraged products, enhanced risk disclosures at the point of trade, and stricter penalties for unauthorized investment advice disseminated through social media.

At the same time, Sebi is mindful of not disrupting market liquidity or hurting genuine hedgers and institutional participants. “It’s a delicate balance,” a source familiar with the matter said. “While protecting investors, the regulator also wants to preserve the depth and efficiency of the derivatives market.”

Some brokerages have welcomed the move, arguing that it’s time for a more structured approach to retail derivatives trading. “Education, safeguards, and digital nudges are needed. We also support a tiered approach, where investor experience and financial capacity determine access to more complex instruments,” said Ruchi Khandelwal, head of compliance at a leading brokerage.

As Sebi intensifies its review, retail investors are being advised to reassess their strategies and be mindful of the risks inherent in the derivatives segment. The coming weeks may bring significant changes to how retail traders interact with India’s booming equity derivatives market.