At the recent FICCI's 21st Capital Market Conference in Mumbai, SEBI Whole Time Member Ananth Narayan highlighted the growing concerns surrounding the frenzy in options trading, particularly as expiry dates approach. This intense trading activity, he warned, could destabilize the market and make it more susceptible to manipulation. Narayan stressed the importance of finding a balance that preserves the benefits of options trading while mitigating the risks.
"The frenzied trading on expiry day raises questions on market stability and vulnerability to manipulation," Narayan stated. He emphasized that while managing this trading frenzy, the goal should not be to discard the positive aspects of options trading. "We must not throw the baby out with the bathwater," he said, though he questioned if there was "any baby in the water at all."
SEBI's current focus is on curbing the systemic frenzy associated with expiry-day trading. Narayan mentioned that five out of seven proposals in the July 30 consultation paper address this issue directly. These include restricting the number of weekly option expiries, increasing margins around expiry day, removing calendar spread benefits on expiry day, monitoring intraday positions, and rationalizing options strikes. The sixth proposal aims to align lot sizes with global markets, while the seventh requires brokers to collect option premiums, which Narayan described as "basic hygiene."
The surge in derivatives trading in India since the pandemic has been remarkable, with nearly 80% of active demat accounts opened post-April 2020. This growth has made the Indian derivatives market a global leader, accounting for 30-50% of worldwide exchange-traded derivatives trading. However, regulators are now raising alarms about potential risks stemming from this rapid proliferation.
SEBI's recent consultation paper aims to protect investors and ensure market stability by addressing the surge in expiry-day trading, particularly in index option contracts. Data shows that a significant portion of this growth comes from speculative trades in deep out-of-the-money (OTM) options on expiry days, commonly referred to as Zero-to-Hero strategies due to their low probability of success but low entry cost.
To mitigate the high implicit leverage in options contracts near expiry, SEBI has proposed increasing the Extreme Loss Margin (ELM) by 3% to 5%. Much of the activity is concentrated in expiry-day contracts, especially those with strike prices far from prevailing market levels, available for a low premium.
Narayan highlighted that 92.5 lakh retail traders and proprietorship firms incurred a trading loss of INR 51,689 crore in FY24, with only 14.22 lakh investors making a net profit, indicating that approximately 85% of traders faced losses.
In his speech, Narayan made it clear that SEBI's intent is not to ban derivatives but to specifically curb the expiry-day frenzy to reduce systemic risks. "Trading in index options close to expiry resembles a slot machine in a casino," he said, stressing the need for regulation to ensure market stability.
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