The markets regulator has red-flagged how expiry day trading in index options can detract from capital formation. Switching to fortnightly expiries could curb the speculative frenzy though it may hurt the revenues of brokers as well as exchanges in the short term, explains Saikat Neogi
What’s making SEBI do a rethink
Last week, Ananth Narayan, a whole-time member of the Securities and Exchange Board of India (SEBI), flagged the surge in short-term equity derivatives trading, particularly expiry-day index options, warning that the current structure may not be sustainable and could impact long-term capital formation. The Futures and Options (F&O) markets are essential for price discovery, hedging and liquidity, especially for institutions and hedgers. However, the recent case where quant trading firm Jane Street was found to have deployed manipulative trading strategies around index options expiry exposes how global institutions with cutting-edge algorithms can distort expiry outcomes in options and underlying stocks. It serves as a wake-up call for retail investors about the hidden risks in derivative trading. These speculative bets divert funds away from productive investments, as nine out of ten individual traders have incurred losses in FY25, with their aggregate losses amounting to Rs 1.06 lakh crore. Narayan has said that the regulator will work towards improving the quality of the F&O market by extending the tenure and maturity of the products.
Can replacing weekly expiry with a fortnightly cycle help?
The weekly expiry system was initially designed to improve liquidity and offer hedging flexibility, but it is now being gamed by institutions using sophisticated algorithms for short-term speculative bets. A high-frequency betting environment tempts retail traders to chase gains from price movements. This increases intra-day volatility, exacerbates leverage misuse and encourages expiry-day betting. Moving to fortnightly expiries could temper this speculative frenzy and curb short-term manipulation. If margin rules and exposure limits don’t reduce that intensity, SEBI may see fortnightly expiries as a way to slow things down. “It is not about eliminating retail activity — it’s about reducing the churn and limiting frequent, high-risk trades that can quickly spiral out of control,” says Puneet Sharma, CEO, Whitespace Alpha, a Category 3 AIF.
But there could be fallouts
The National Stock Exchange, where options trading accounts for over 70% of revenues, could see a drop in trading volume and hence transaction-based revenue, at least temporarily. Brokers reliant on high churn and options volume (e.g., discount platforms) may also face a revenue hit. Institutional traders, however, may benefit from lower volatility. Market makers may adapt quickly, but the short-term disruption in retail volumes could create a double-digit impact on overall turnover. Market participants say the impact will be on liquidity, efficient price discovery and risk management through hedging. That said, these are calculated trade-offs SEBI seems willing to accept in pursuit of long-term market stability and investor protection. Varun Fatehpuria, founder & CEO, Daulat Finvest, says short-term speculative traders might scale back, reducing market churn. “Over time, healthier, more sustainable trading patterns may emerge, benefiting the broader ecosystem despite immediate revenue impacts,” he says.
More safeguards by SEBI, exchanges
To prevent Jane Street-type manipulations, SEBI and the exchanges must adopt advanced real-time monitoring systems integrating cash and derivatives markets. Exchanges have surveillance systems, but they can be more proactive. Pattern recognition, alert triggers for coordinated trades and expiry-day anomalies can be better flagged in real time. The response needs to be quick, too. When sophisticated players know there’s oversight, it has a deterrent effect. Rapid identification of suspicious trades through AI-driven analytics can strengthen SEBI’s capacity to quickly respond and deter market manipulation. Sonam Srivastava, founder, Wright Research PMS, says tighter disclosure norms for proprietary trading volumes—segregated by algo desks, market makers, and arbitrage players—can detect concentration risk. “Circuit breakers or volatility interruption mechanisms tied to open interest spikes or implied volatility could pre-empt engineered index swings. Greater coordination with exchanges and clearing corporations is key,” she says.
Hike in margins to curb manipulation
While stock trading requires the trader to pay the full value of the stock, in derivatives trading one can hold assets by depositing a smaller amount, known as margin. Through this margin, traders can leverage their position and control bigger trades without committing substantial capital. Higher margins will ensure that traders deposit more money upfront, reduce leverage and the potential for price manipulation. Higher margins will also increase the cost of deploying large directional trades. Exchanges could further refine this by dynamically increasing margins where there is evidence of order-book thinning. It would especially impact manipulators with capital-light setups and protect smaller players. By increasing the financial stakes for manipulators, SEBI can reduce short-term market distortions. Coupled with surveillance, this could improve expiry-day behaviour significantly.