MUMBAI, Nov 13 (Reuters) – The sudden and explosive growth in stock options trading in India this year has sparked enthusiasm among the country’s retail traders and regulators worried about the risks such speculative fervor could generate.

The rise in derivatives trading in the country’s historically conservative markets, where some products such as stock futures are still too expensive, came after exchanges tweaked some options contracts to facilitate more bets. faster and cheaper and that online retail trading platforms have proliferated.

Data from the stock exchanges, which are the big winners from this surge in demand, show that the average daily value of the assets underlying these stock options more than doubled between March and October to reach $4.2 trillion. The ratio between the notional value of derivatives and that of spot transactions is the highest in the world.

India’s stock market regulator, the Securities and Exchange Board of India (SEBI), has not yet moved 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 than for hedging purposes, said Mihir Vora, chief investment officer at Trust Mutual Fund. “This can amplify any sharp market decline and pose a potential risk,” he said.

SEBI and India’s main stock exchanges, the National Stock Exchange of India Ltd (NSE) and BSE Ltd (BSEL.NS), did not respond to Reuters emails.

But Ashish Chauhan, director of the NSE, said in a message to investors: “Derivatives trading by retail investors should be avoided due to the high risk involved. Be a long-term player.”

Analysts cite historical examples of beginning retail investors being affected by derivatives trading, including in South Korea in the early 2000s, when regulators had to impose barriers to retail participation.

Moreover, India’s more nascent derivatives markets lack safeguards. Regulators have so far imposed no minimum net worth or investor qualifications for those trading stock options, and stock markets almost always rise every year — both recipes for higher risk-taking and complacency.

Dozens of digital trading platforms such as Zerodha, Groww and AngelOne (ANGO.NS) have emerged as leading brokerages over the past two years amid the fintech boom and pandemic lockdown environment push small investors looking for a quick investment. return to robot trading and other low-cost platforms.

Axis Mutual Fund estimates that there are 4 million active derivatives traders in the country. The traders are mostly small players, according to SEBI data.

Axis said in a report that there was up to 500 times leverage on some options, meaning a bet of 2,000 Indian rupees ($24.01) gives the option holder an exposure worth Rs 1 million, and often retail investors would hold these bets for just 30 minutes on average. .

Interest in derivatives trading in India has exploded


The total number of derivatives contracts traded on the National Stock Exchange – which accounts for the bulk of options trading volumes – stood at 39.85 billion between April and September, almost close to the 41.76 billion traded during for the financial year ending March 2023.

Up to 99% of them are options contracts, which allow their holders to bet on the rise or fall of a stock or index by paying a fraction of the stock’s value.

The “sharp” increase in daily options trading volume raises investor protection questions, said Ajay Tyagi, former SEBI chief. “There is froth in the market and retail investors are looking 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, with hundreds of stock traders, brokers and investment advisers crammed into offices spread across five floors.

Bhavesh Shah sits in a small booth behind a translucent door in the square. A notice on his door promises that with 500 Indian rupees ($6.00) per month, one could earn up to 150,000 Indian rupees.

Shah says his youngest client is 21 and invests small amounts of money earned through odd jobs. “These kids play a lot of games; they consider it a game, too,” he said.


SEBI will soon require all major brokerages to issue specific warnings on market risks, two sources familiar with the regulator’s thinking said. SEBI is also pushing exchanges to review incentives offered to high-volume traders, they said.

Preliminary discussions have also been held on raising taxes that could reduce speculative activity, a third source familiar with the discussions said.

However, tax decisions are made by the government and the regulator can, at best, recommend such a change.

The sources declined to be named because they were not authorized to speak to the media.

Zerodha, one of the largest discount trading platforms in India, claims that more than 65% of its users are new investors and more than 60% of new accounts are from small towns. The average age of users who joined last year is 29 years old.

The platform has seen an increase in futures and options trading activity, Zerodha said in response to questions from Reuters.

People who frequent financial markets in small, bustling Indian cities are generally less savvy than those who frequent commercial hubs like Mumbai or Ahmedabad.

Trading accounts in India

Despite the risks, many young investors remain motivated.

Siddharth Joshi, a 36-year-old from Surat in western India, said he lost 200,000 rupees worth of trading options on Adani Enterprises (ADEL.NS) shares in January. But he is not giving up, he told Reuters by telephone.

“In options trading, I know my loss is capped but there is an opportunity to make maximum profit,” he said. ($1 = 83.2575 Indian rupees)

Reporting by Ira Dugal and Jayshree P. Upadhyay Editing by Vidya Ranganathan and Raju Gopalakrishnan

Our Standards: The Thomson Reuters Trust Principles.

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