India tightens derivatives trading rules after retail options frenzy

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

India’s capital markets regulator has raised the barriers on derivatives trading to curb the frenzy among millions of young retail investors who have piled into high-risk options and short-term bets on the country’s booming stock market.

The Securities and Exchange Board of India on Tuesday imposed tough measures including raising the minimum contract size on index derivatives by about three times to at least Rs1.5mn ($18,000). It also reduced the amount of tradable weekly options contracts to one per exchange from November.

The crackdown comes after the watchdog and India’s finance ministry repeatedly issued warnings about the risks involved in derivatives markets. Investors can use options to leverage their bets, by borrowing many times the amount they have on deposit, but they can magnify losses as well as gains.

The Indian stock market has soared in recent years as the country has become the world’s fastest growing large economy. While its expanding number of middle-class households are increasingly investing their savings in domestic equities, analysts have likened the fevered interest in derivatives trading to gambling in a nation where betting is not legal.

“The equity cult has been going up in India,” said Kranthi Bathini, director of equity strategy at WealthMills Securities in Mumbai.

The problem is “uninformed, uneducated investors are becoming prey to this retail speculative frenzy, that’s where the regulator and the ministry of finance is concerned”, he added.

Many Indians have also been spurred on by a proliferation of cheap discount online brokerages and popular, if largely unregulated, “finfluencers” who dish out trading tips on social media.

In a recent study, Sebi said fewer than one in 10 future and options traders made a profit. Its latest order noted the trend of “increased retail participation” as well as “heightened speculative trading columns in index derivatives on expiry day”.

Research by Mumbai-based Axis Mutual Fund found that the number of active derivatives traders in India shot up to 4mn last year compared with fewer than 500,000 before the coronavirus pandemic. Most of them resided in the country’s smaller cities and were below the age of 40.

The trend has drawn wider global attention after the notional value of options on India’s benchmark Nifty 50 index overtook those on the S&P 500 and quant trading firm Jane Street reportedly made $1bn on trades in the country’s option market last year.

Sebi’s action is just the latest attempt to cool India’s retail trading mania. While its latest order was published after local market hours, in July shares of listed Indian brokerages, which have cashed in on the derivatives boom, fell after new rules mandated uniform charges that are not discounted for high volumes.

The regulator’s new curbs would “have some impact”, Bathini said.