On a day when the overall markets felt the heat of the Iran-Israel conflict, shares of several brokerages had another negative to deal with — the new futures and options (F&O) norms, which are expected to hit both revenues and profits of these firms.
Consequently, stock prices of brokerages slumped nearly 8% on Thursday after the Securities and Exchange Board of India (SEBI) rolled out stricter regulations for the F&O market. This move has sparked concerns that trading volumes could plummet by as much as 30-40%, dealing a significant blow to discount brokers and market makers.
On Tuesday, the markets regulator announced a phased implementation of its six-step plan to curb the excessive speculation in the over Rs 500-lakh-crore derivatives segment and taper down the heavy losses incurred by retail investors.
These measures, set to take effect in phases starting November 20, include a higher minimum contract value of Rs 15 lakh, limit on weekly expiry to just one per exchange and a rise in margins closer to expiry.
Nithin Kamath, founder and CEO of Zerodha, said on X, “As things stand, assuming that those trading weekly don’t move on to trading monthly, the impact will be ~60% of overall F&O trades and ~30% of our overall orders.”
He further said the brokerage house will decide on the need to change its pricing structure based on the impact the business faces from November 20.
Almost all broking stocks closed in the red, with 5 Paisa falling as much as 7.7%, followed by Motilal Oswal Financial Services (5.8%). Shares of IIFL Securities and ICICI Securities dropped 4.8% and 4.5%, respectively. Bucking the trend, shares of Angel One managed to close over 5% higher after having dropped over 5.8% at the start of the session on Thursday.
Jefferies has estimated that the fresh curbs, particularly on weekly expiries, will affect 35% of the industry’s premiums and bring down retail participation in the options space. Retail-focussed discount brokers and exchanges are expected to be the most affected from the shrinkage in industry premiums, it said in a report. However, the global firm said the phased rollout over the next 3-6 months is a big positive “as it prevents any systemic shocks and leads to a calibrated tightening of the market”.
Similarly, Citi group expects a gradual shrinkage in retail volumes, with around 35% of index option premium turnover on the NSE affected. Meanwhile, IIFL Securities expects NSE’s option premium turnover to get hit by up to 40%, while that of BSE’s by 20%.
Shares of BSE jumped almost 10% on Thursday on expectations that this new rule will help the company a shot at having a 50% market share in weekly options contract volumes. In September, the average daily trading volume for the NSE’s cash market segment stood at Rs 394 lakh crore, while that of the BSE was around Rs 144 lakh crore.
Some also expect the volumes to shift to the Gujarat International Finance Tec-City (GIFT City), where GIFT Nifty contracts are traded on the NSE International Exchange (NSEIX). “Limiting weekly expiries to a single index on the NSE and BSE could encourage a shift in trading volumes towards GIFT City, which still offers a wider range of weekly options. From a foreign investor perspective, this creates an attractive opportunity for those seeking flexibility in trading strategies,” said Rohit Agarwal, CEO-funds business at Dovetail Capital.
He said while the NSE remains the dominant player, averaging 10.8 billion equity derivatives contracts monthly in 2023-24, GIFT City, although growing, represents less than 1% of the NSE’s volume with around 2 million contracts.