K Srinivasan
IN July this year, the Securities and Exchanges Board of India put out a consultation paper on “measures to strengthen index derivatives framework for increased investor protection and market stability”. The country’s stock exchange regulator expressed alarm at the “findings around increased speculative/trading hyperactivity in index options segment combined with poorprofitability outcome for individual investors”, and announced the creation of an Expert Working Group (EWG) “with an objective of actively enhancing investor protection and ensuring market stability.”
As part of this process, Sebi also outlined some of the steps it intended to pursue once the consultative e process was over. This included minimum contract size, rationalisation of weekly index products, increase in margin near contract expiry, upfront option premium, and removal of expiry day calendar spread benefit. Now all of these are technical terms that concern the trading of futures and options also commonly known as derivatives.
Index options trade
As the Times of India reported, “trading in index and stock options has soared in India in the last few years, fuelled mainly by retail investors, sparking warnings from market participants and Government officials. The notional value of index options traded more than doubled in 2023-24 to $907.09 trillion from the year before. Of the 108 billion options contracts traded worldwide in 2023, 78% were on Indian exchanges, according to data from the Futures Industry Association(FIA). Retail investors make up 35% of derivative trading in the country. In April, 78% of trades done on India’s largest exchange, the National Stock Exchange were by investors trading less than 1 million rupees ($11,969).”
Finally, on October 1, Sebi formalised what it had outlined as the remedial measures in its consultation paper. All these measures will kick in one by one beginning next month till the middle of 2025. Will it bring down trading? Perhaps yes in the short term. But in the longer term, it will be back to business as usual. One seasoned and well-known trader who also has a YouTube channel stated that gambling comes to an end by restricting the flow of money or people into a casino.
The underlying truth
He did hit the nail on the head, but he also exposed what is the underlying truth of the stock markets. Beginning Covid and onwards as the number of entrants into the market picked gears moving from a torrent to a tsunami.
Most of them were green around the ears looked at any tip available on YouTube and lost heavily. So what Sebi has done is to pick one element of the entire matrix the retail trader and twist his arm. But what about the easy access to the stock market where trading platforms like Zerodha and Upstox have revolutionised the way we trade? Now if there are no barriers on who can trade, it is inevitable that there will be a deluge, which is what has happened.
Also, there is little that SEBI has done to come down on the hundreds of advisors and YouTube pundits who are minting millions by telling you have Rs 10,000 is assured every day in trading. And most of you who are reading this, please would have received at least a minimum of 2 to 3 calls each day, telling you how the caller would tell you the level at which the Nifty will operate and how you can benefit from it. There is nothing that SEBI or the telecom authorities have done to stop this racketeering.
Illusion of control
ArunChulani, Co-Founder, First Water Capital, in a perceptive piece in the Economic Times had the last word: “In the end, the illusion of control in investing is just that – an illusion. No one, not even the most skilled investor, can consistently predict or control the markets. But what we can control is our behaviour, strategy, and discipline. By focusing on long-term, evidence-based investing, we can avoid the pitfalls of overconfidence and give ourselves the best chance for success. In a market as dynamic as India’s, it’s easy to get swept up in the idea that anyone can win big. But remember: the market isn’t something to be conquered, only navigated.” In this case, Sebi is fast-tracking the navigation and telling you where to go and what’s good for you.
