The new curbs in high-risk derivatives trading introduced by the Securities and Exchange Board of India on Tuesday will restrict retail investors who have a low capital base from engaging in speculative trading in options to catch premiums and push volumes down, experts said.
"This was expected. Volumes in options trading are likely to shrink going ahead," Rajesh Palviya, senior vice president of technical and derivatives at Axis Securities Ltd., told NDTV Profit.
One of the changes by SEBI includes the mandatory upfront collection of option premiums from buyers, which will prevent undue intraday leverage. "It has been decided to mandate collection of options premium upfront from option buyers by the trading member or clearing member," the market regulator said in a circular. This requirement will take effect in February 2025.
'Gambler Instinct' Not Going Away
Market veteran Sunil Subramaniam, however, believes "speculators" will remain in the market even if the cost as well as extent of potential loss in F&O increases following SEBI rules. He drew parallels with regulations on gambling.
"No amount of restrictions prevents a gambler. The gambling instinct will come in. Their losses will go up, but they can't be prevented from taking these bets. I don't expect any significant drop (in activity)," he told NDTV Profit.
"The risk has gone up, so they will expect a higher reward. The gambler instinct will never go away," he said.
How Calendar Spread Removal Helps
The SEBI's action to remove calendar spread treatment on the expiry day of contracts effective from February 2025 will create a "level playing field" between retail investors and seasoned players because it would require higher margins to deploy sophisticated strategies, Palviya said.
A calendar spread is an F&O strategy where an investor simultaneously enters long and short positions on the same underlying asset but with different delivery dates.
He said participation in this form of trading primarily involves resourceful investors who undertake strategies like algo-trading that execute trades by using pre-defined programmings to benefit from margins. Now, that benefit will be lost.
Impact On Discount Brokers
The SEBI has increased the minimum contract size for index derivatives to Rs 15 lakh. On the other hand, stock exchanges will only be allowed to offer weekly expiry derivatives contracts on one benchmark index, reducing speculative trading and volatility on expiry days. These rules will also come into effect on Nov. 20.
These changes will hit operating margins of discount brokers, which have largely kept equity trading free of cost but relied on charges in derivatives, said market veteran Sunil Subramaniam. "Definitely there will be an impact on discount brokers and exchanges, and re-rating can happen," he said.
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