08

There was a time when trading in the Indian capital market was highly fragmented, scattered across 21 regional stock exchanges operating in various tier-II cities along with the metropolitan centres. Volumes were small, participants were few, and institutional investments came largely from a handful of domestic financial entities and corporations. Settlement was not unified, and deliveries were made in physical share certificates. This left scope for price arbitrage and “carry forward” trades, financed by badla financiers who charged interest. Unsurprisingly, the market was fraught with risks associated with settlement failures.

The formation of SEBI in 1992 marked a turning point. With the advent of electronic trading and settlement, and later the introduction of stock and index derivatives, the parallel badla market was dismantled. Over the years, volumes grew exponentially, driven by retail participation, foreign funds, and domestic institutions. While this shift helped the market achieve greater maturity, it also brought in a new breed of retail investors, many with a “casino” mindset seeking quick profits.

Initially, brokers offered online trading facilities through web portals, and later through mobile apps, which vastly expanded the investor base. In the cash or spot market, an investor has two choices: pay and take delivery of shares, or square off the position on the same day. Either way, funds must be deployed or profits/losses realised immediately. Equity derivatives, by contrast, allow positions to be carried forward for up to 90 days by paying a premium or margin. This speculative element has made the F&O segment particularly attractive to retail investors.

Between FY19 and FY22, the F&O segment saw a massive influx of retail participation, which continued into FY23 and FY24. Unfortunately, this coincided with severe losses for many investors, revealing both a poor understanding of derivatives and mismatched expectations of returns.

Two consecutive SEBI analytical reports (2023 and 2024) highlighted this trend starkly. The number of unique individual traders in the F&O segment through the top 10 brokers rose from 7.1 lakh in FY19 to 45.2 lakh in FY22—a rise of over 500%. Yet, 89% of these traders incurred losses, with the average loss per trader at ₹1.1 lakh in FY22. The situation worsened in subsequent years. Between FY22 and FY24, 1.13 crore traders together suffered net losses of ₹1.81 lakh crore. In FY24 alone, retail traders lost about ₹75,000 crore.

Beyond adverse price movements, high transaction costs further eroded returns. Between FY22 and FY24, retail investors spent over ₹50,000 crore on such costs: ₹25,000 crore in brokerage, ₹13,800 crore as statutory levies (STT, GST, and stamp duty), and ₹10,200 crore in exchange fees. On average, each individual trader spent ₹26,000 in transaction costs in FY24 alone.

Demographic data reveals another worrying trend. The share of young traders (below 30 years) rose from 31% in FY23 to 43% in FY24. However, losses were disproportionately higher among this group—93% of them lost money in FY24, compared to 79% among traders above 60. This suggests that experience, risk aversion, and disciplined strategies play a crucial role in navigating derivatives markets.

Behind these numbers lies the classic interplay of fear and greed. Capital markets inherently carry systematic and unsystematic risks, and only prudent investors—those who understand F&O products and employ sound trading strategies—can mitigate them. Without such preparedness, retail participants will continue to face losses.

In October 2024, SEBI raised entry barriers for retail investors by mandating a minimum contract value of ₹15 lakh for index derivatives, with lot sizes designed to keep contract values within ₹15–20 lakh at review. It also imposed an additional 2% Extreme Loss Margin (ELM) on all short index options contracts due for expiry, applicable both on existing and new contracts, thereby raising margin requirements to improve risk coverage.

SEBI’s think tank is already considering further tightening of norms. Whether these measures can provide a safer framework for derivatives trading and make returns sustainable remains to be seen...