Curb excessive trading in derivatives: Sebi may mandate stricter risk profiling

Income disclosures a possibility too.

SEBI market rules
It is not clear if Sebi will take steps to ban certain types of riskier F&O strategies or mandate a stricter risk profiling of clients from brokers.

By Ashley Coutinho

The Securities and Exchange Board of India (Sebi) is deliberating on ways to dissuade retail investors from recklessly punting in the equity derivatives segment.

The regulator may mandate risk profiling and income disclosures of investors, among other things, to curb excessive trading and speculation, according to people in the know.

“The regulator is concerned about investors losing money in the F&O segment and is looking at ways by which it can educate investors and discourage them from taking undue risks,” said a person familiar with the matter, adding that about a fifth of retail investors trading in futures and options, or F&O, could be millennials and another fifth could be senior citizens.

In June, Sebi had reached out to the country’s top brokers, asking them to furnish details of F&O clients, including age, income range, city and the profits made from trading in the segment in the year before and after the pandemic.

A few months back, the NSE, which enjoys a monopoly in the F&O segment, had reached out to a number of intermediaries for suggestions on curbing speculative F&O bets from retail investors.

On Monday, the NSE put out an advertisement in a leading business daily warning investors to be aware of the risks involved while trading in options. “Retail investors should trade in derivatives, especially options, only if they have high-risk tolerance and have relevant trading experience. Be aware of the risk of losing substantial amounts by options sellers if the underlying price movement is not in the anticipated direction and the risk of losing the entire amount paid by options holder in a relatively short period of time. Moreover, writing options to recover losses made in the markets is an extremely risky trading strategy,” the advertisement said.

It is not clear if Sebi will take steps to ban certain types of riskier F&O strategies or mandate a stricter risk profiling of clients from brokers. An email sent to the Sebi and NSE did not get a response.

“Brokers are allowing practically everyone to trade in derivatives, even those with less than Rs 50,000 in their bank account. There has to be some checks and balances in place,” said a broker, on condition of anonymity.

Trading in the options segment of the exchanges has touched a record high in the past year amid an uptick in margins in the futures segment, increased activity from algo traders, a weekly expiry cycle and the entry of new traders in the aftermath of the Covid-19 pandemic.

Small traders are betting as little as Rs 15,000-20,000 in the options segment, most of which is speculative and bet on the direction the Nifty will move in a particular week. More than 90% of the retail or small traders are losing money this way, which does not bode well for the long-term equity culture in the country, said experts.

“No brokers would want his clients to make loss-making trades. But very often the risk profile of a trade doesn’t match the risk profile of the client. And that is the nub of the problem,” said Siddarth Bhamre, head of research at Religare Broking.

According to him, it would be a mistake to actively prevent investors from trading in the segment. “F&O trading is a zero-sum game. You can’t step in and say that retail investors cannot make losses or that they can stick to only certain types of strategies or trades. The regulator, exchanges and intermediaries should instead focus on educating customers,” Bhamre said.

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