F&O Trading: Young Individual Traders Refuse To Quit Despite Losses

India is young and restless. The proportion of traders under the age of 30 in the F&O segment increased from 31% in the financial year ended March 2023 to 43% in the previous financial year, according to a study released by the Indian markets regulator, Securities and Exchange Board of India. This as nine out of 10 individual traders experienced losses in the futures and option or F&O trading over the three years ending in March 2024. The total losses amounted to more than Rs.1.8 lakh crore.

The study found that individual traders incurred average losses of around Rs.2 lakh each, including transaction costs. The top 3.5% of loss-makers, about 4 lakh traders, faced average losses of Rs.28 lakh each.

The losses are not serving as a deterrant it seems. Over 75% of individual F&O traders in the fiscal year 2023-24 had an annual income of less than Rs.5 lakh. Also, more than 75% of traders who incurred losses continued to trade in the F&O segment, despite facing consecutive years of losses. The study revealed that only 1% of individual traders earned profits exceeding Rs.1 lakh after accounting for transaction costs.

Meanwhile, proprietary traders and Foreign Portfolio Investors earned gross trading profits of Rs.33,000 crore and Rs.28,000 crore, respectively, in FY24, before transaction costs. In contrast, individual traders and others lost over Rs.61,000 crore. Most of the profits among larger entities were generated through trading algorithms, with 97% of FPI profits and 96% of proprietary trader profits coming from this method.

The study comes after the markets regulator, in July, released a consultation paper proposing seven measures to reduce the F&O trading surge. SEBI proposed new measures aimed at improving investor protection and market stability in the growing derivatives market. These include requiring trading members and clearing members to collect options premiums upfront from buyers.

Currently, there is no explicit requirement for the upfront collection of options premiums from buyers, though margins are collected for futures and short options positions.

The market regulator is considering a phased revision of the minimum contract size for index derivatives. Initially, the minimum value of a derivatives contract is proposed to be set between Rs 15 lakh and Rs 20 lakh. After six months, this will increase to between Rs 20 lakh and Rs 30 lakh.

Currently, the minimum contract size for derivatives is set between Rs 5 lakh and Rs 10 lakh, a requirement last revised in 2015.