Retail traders continue to lose money in the high risk-reward equity derivatives market, with 93% of them incurring an average loss of Rs 2 lakh during the last three financial years, as per a study released by the Securities and Exchange Board of India (SEBI) on Monday.
Retail traders incurred a combined net loss of Rs 1.81 lakh crore between FY22 and FY24 in the futures and options (F&O) segment. The number of loss-making individual investors went up to 91.1% in FY24, from 90.2% in FY22.
This comes at a time when market participants await the market regulator’s final regulations in a bid to curb the increased retail investor frenzy and speculation in the Rs 500-lakh crore F&O market. SEBI has proposed seven step measures, which are likely to be approved at its upcoming board meeting at the end of the month.
These measures followed a series of cautionary signals from various financial regulators, including the Reserve Bank of India (RBI), and the finance minister, about the risks of losing household savings by taking punts in the derivatives segment.
While retail investors have remained active in the F&O segment despite the proposed measures and warnings, a concerning fact in the report showed that even after years of losses, over 75% of traders continued their activity in F&O.
“Rapid growth in F&O trading activity has once again highlighted the need for investor education and risk management practices, as a significant proportion of retail traders continued to incur losses in the market. A rise in individual traders’ participation in the F&O segment has also kick-started a debate on product suitability and the need for safety nets and firewalls for individual investors,” said SEBI in its report.
While 99.8% of F&O traders are individual investors, they contributed only 30% of the total turnover in FY24. The number of retail traders has almost doubled in the last two years, from 5.1 million in FY22 to 9.6 million in FY24, the report said.
In FY24, nearly 7.3 million individual traders lost money, with an average net loss of Rs 1.2 lakh per person, inclusive of transaction costs. Meanwhile, foreign portfolio investors (FPIs) and proprietary traders booked gross trading profits of Rs 28,000 crore and Rs 33,000 crore, respectively, in FY24.
“Most of the profits were generated by larger entities that used trading algorithms, with 97% of FPI profits and 96% of proprietary trader profits coming from algorithmic trading,” SEBI said.
The aggregate losses of 11.3 million individual traders exceeded Rs 1.8 lakh crore between FY22 and FY24. In FY24 alone, individuals incurred about Rs 75,000 crore in net losses.
The top 3.5% of loss-makers (around 4 lakh traders) faced an average loss of Rs 28 lakh per person over the last three financial years.
Only 7.2% of individual F&O traders made a profit over the period of three years, while only 1% of the individual traders managed to earn profits exceeding Rs 1 lakh after adjusting for transaction costs. “For the profit-makers, the average per person profit was Rs 3 lakh per person,” SEBI said in its analysis.