MUMBAI, Nov 13 (Portal) – A sudden explosion in stock options trading in India this year has sent the country’s retail traders into a frenzy and regulators worried about the risks such speculative enthusiasm could generate.
The boom in derivatives trading in the country’s historically conservative markets, where some products such as stock futures are still too expensive, came after exchanges changed some options contracts to allow faster and cheaper bets, and as online retail platforms such as Mushrooms shot out of the ground.
Data from exchanges that are big winners from this surge in demand show that the daily average value of the assets underlying these stock options more than doubled to $4.2 trillion between March and October. The ratio of notional value of derivatives to spot trading is the highest in the world.
The Securities and Exchange Board of India (SEBI) has so far not intervened to restrict trading, but has issued warnings and said it is aware of the risks.
Market analysts are worried.
The surge in options activity is more speculative in nature than for hedging purposes, said Mihir Vora, chief investment officer at Trust Mutual Fund. “This can amplify sharp market declines and pose a potential risk,” he said.
SEBI and India’s top bourses, the National Stock Exchange of India Ltd (NSE) and BSE Ltd (BSEL.NS), did not respond to emails from Portal.
But NSE chief Ashish Chauhan, in a message to investors, said: “Trading in derivatives by retail investors should be avoided due to the high risk involved. Be a long-term player.”
Analysts point to historical examples of new retail investors being harmed by derivatives trading, particularly in South Korea in the early 2000s when regulators had to enforce limits on retail investor participation.
Furthermore, India’s emerging derivatives markets lack guardrails. To date, regulators have not mandated minimum net worth or investor qualifications for stock options trading, and stock markets have been rising almost every year – both recipes for greater risk-taking and complacency.
Dozens of digital trading platforms such as Zerodha, Groww and AngelOne (ANGO.NS) have emerged as top brokerage firms in recent years as a fintech boom and the work-from-home environment due to the pandemic drive retail investors looking for a quick return to robo-trading and other low-cost platforms.
Axis Mutual Fund estimates that there are 4 million active derivatives traders in the country. According to SEBI data, the traders are mostly small players.
Axis said in a report that there is up to 500x leverage on some options, meaning a bet of 2,000 Indian rupees ($24.01) gives the option holder exposure worth 1 million rupees, and retail investors These bets often only lasted an average of 30 minutes.
There has been a surge in interest in derivatives trading in India
RETAIL SERIES
The total number of derivatives contracts traded on the National Stock Exchange – which accounts for a majority of options trading volume – was 39.85 billion between April and September, almost close to the 41.76 billion traded in the fiscal year ended March 2023. were traded.
Up to 99% of these are options contracts, which allow holders to bet on the rise or fall of a stock or index in exchange for paying a fraction of the stock’s value.
The “sharp” rise in daily options trading turnover raises investor protection questions, said Ajay Tyagi, former SEBI chief. “There is froth in the market and retail investors are trying to make easy money with limited understanding.”
Kailash Plaza, a building in Mumbai’s eastern suburbs, has become one of the focal points of the boom. Hundreds of stock traders, brokers and investment advisors are crowded into offices on five floors.
Bhavesh Shah sits in a tiny booth behind a transparent door in the square. A sign on his door promises that for 500 Indian rupees ($6.00) a month you can earn up to 150,000 Indian rupees.
Shah says his youngest customer is 21 years old and invests small amounts of money he earned through odd jobs. “These young people play a lot of games; they also see this as a game,” he said.
SEBI WARNS AND WATCHES
SEBI will soon require all major brokerage firms to issue specific warnings on market risks, two sources familiar with the regulator’s thinking said. SEBI is also urging stock exchanges to review incentives for wholesalers, it said.
There have also been preliminary discussions about a tax increase that could reduce speculative activity, a third source familiar with the discussions said.
However, decisions about taxes are made by the government and the regulator can only recommend such a change.
The sources did not want to be identified because they were not authorized to speak to the media.
Zerodha, one of India’s largest discount trading platforms, says more than 65% of its users are first-time investors and over 60% of new accounts come from small towns. The average age of users who joined in the last year is 29.
The platform has seen an increase in futures and options trading activity, Zerodha said in response to Portal queries.
People who hang around the financial markets in India’s busy small towns tend to be less astute than those in trading hubs like Mumbai or Ahmedabad.
Trading Accounts in India
Despite the risks, many young investors remain excited.
Siddharth Joshi, a 36-year-old from Surat in western India, said he lost 200,000 rupees trading options on shares of Adani Enterprises (ADEL.NS) in January. But he is not giving up, he told Portal by telephone.
“In options trading, I know that my loss is limited, but there is a chance to make the maximum profit,” he said. ($1 = 83.2575 Indian rupees)
Reporting by Ira Dugal and Jayshree P. Upadhyay. Editing by Vidya Ranganathan and Raju Gopalakrishnan
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