In March, when the Securities and Exchange Board of India (Sebi) proposed two weekly expiry days—Tuesdays and Thursdays—it noted, “in the multi-exchange framework, spacing out of expiry days through the week reduces concentration risk and provides an opportunity for stock exchanges to offer product differentiation to market participants. At the same time, too many expiry days have the potential to revive expiry day hyperactivity, which could jeopardise investor protection and market stability”. The observation followed the perception that the stiff competition between the two leading exchanges—NSE and BSE—for market share in the derivatives segment was unhealthy for investors. More importantly, the regulator wanted retail investors to reduce their enthusiasm in the derivatives markets.
Investor Safety vs. Market Needs
While there has been a drop in the participation of retail investors year-on-year in the equity derivative segment by 9% in premium terms, compared to two years ago it is still up by 34%. Similarly, the number of unique individual investors in the equity derivative segment is down 20% on year, but up by 24% from two years ago. The market regulator understandably isn’t happy with the pace of reduction. In that context, Sebi chairman Tuhin Kanta Pandey’s latest comment that the market regulator is looking to further increase the tenure and maturity of derivative contracts is on a sound footing. Also, his observation that the cash equities market, which has doubled over a three-year period in terms of daily traded volumes, needs more push because it is the true foundation of capital formation is well-intentioned as one of the Sebi’s main mandates is to protect investors’ interest as well as ensure long-term capital formation.
Consequences of regulatory overreach
But it’s time perhaps for Sebi to take a step back and reflect, simply because the stock market is meant to cater to both investors and traders. Globally, there are daily equity derivative contracts in most developed markets such as the US, Europe, and Japan. All markets will have to cater to traders because they play an important role in market making. Also, businesses of big exchanges and brokerages are built around traders as well because they bring in the volumes that make their businesses profitable and bring vibrancy to stock markets. As the sharp drop in the share prices of BSE and brokerages like Angel One showed, their businesses are likely to get hurt badly if there is further tinkering with tenures and maturities of equity derivatives.
Already these players are grappling with the change in the derivative guidelines that began from November 2024. As BSE MD and CEO Sundararaman Ramamurthy told FE recently the impact of these norms is still to play out on its balance sheet, and the Bankex has lost all its volumes since it was shifted from weekly to monthly contract. And the big boy of exchanges, NSE, is gearing up to list. Constant change in regulations is quite likely to hit valuations, profits, and thereby, reduce investor interest in these important market intermediaries. Protection of retail investors and long-term capital formation are great goals, but they cannot be the only ones for the market regulator. It’s not that retail investors are not investing for the long term. As the mutual fund monthly systematic investment plan numbers show, retail investors are investing in record numbers. The market regulator should give every stakeholder—intermediaries and investors—some breathing space. One’s welfare can’t be at the cost of the other.