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The Securities and Exchange Board of India (SEBI), the market regulator in India, is reportedly considering measures to curb weekly expiries in the derivatives market, specifically options trading. This consideration stems from concerns that these frequent expiries are fueling excessive speculation without contributing meaningfully to the nation's economy. The revelation of this potential regulatory shift has triggered a negative reaction in the stock market, particularly affecting companies involved in capital markets. BSE, Angel One, and CDSL experienced a decline in their stock prices, reflecting investor apprehension regarding the potential impact of these measures on trading volumes and revenue streams. The rationale behind SEBI's consideration is rooted in the belief that weekly expiries encourage speculative trading activity, potentially leading to market volatility and instability. The Ministry of Finance, during discussions with SEBI officials, reportedly voiced concerns that these short-term instruments primarily serve speculative purposes rather than contributing to long-term investment or capital formation. In response to these concerns, SEBI is exploring several options to mitigate the perceived risks associated with weekly expiries. One proposed measure involves reducing the frequency of these expiries, potentially shifting to bi-monthly or monthly intervals. This would effectively extend the timeframe for options contracts, discouraging short-term speculation and encouraging a more long-term investment perspective. Another option under consideration is increasing margin requirements for options trading. This would require traders to allocate a larger portion of their capital as collateral, making speculative positions more expensive and potentially reducing the overall volume of options trading. Conversely, SEBI is also considering reducing margin requirements for cash trades, aiming to incentivize investment in the underlying assets and promote a more balanced market dynamic. Furthermore, there is discussion about increasing the Securities Transaction Tax (STT) on options trading while reducing it on cash trading. This would directly impact the cost of trading, making options trading relatively more expensive and cash trading more attractive. However, implementing changes to the STT would require approval from the Union Budget, making it a longer-term consideration. It is crucial to note that SEBI has not yet made any final decisions regarding these measures. The regulator intends to release a discussion paper inviting stakeholders to provide feedback on the proposed changes. The comments and suggestions received during this consultation process will be carefully evaluated by the SEBI board before any concrete measures are implemented. The potential impact of these measures on capital market stocks is significant. A reduction in option volumes and a decrease in expiry-day volatility could lead to a decline in revenue for brokerage firms and other market intermediaries. Consequently, investors are reacting cautiously to the news, leading to the observed decline in stock prices of companies like BSE, Angel One, and CDSL. Ananth Narayan, a whole-time member of SEBI, has previously expressed concerns about the disproportionate volume in short-term F&O contracts. He highlighted the imbalance between the turnover in index options and the underlying cash market, suggesting that such an imbalance is unhealthy and could have adverse consequences for market stability and price formation. Narayan also pointed out that research suggests expiry-day option trading can increase market volatility and potentially undermine confidence in price formation. He argued that short-term derivative products like expiry-day trading in index options might detract from capital formation, as they primarily cater to speculative activities rather than long-term investment strategies. The Association of National Exchanges Members of India (ANMI) has also been advocating for reforms in retail participation in equity F&O. ANMI's concerns stem from the high percentage of retail traders who incur losses in this segment, despite recent safeguards implemented by SEBI. ANMI suggests strengthening eligibility norms, position limits, risk management frameworks, and investor protection measures to ensure responsible and sustainable participation in the F&O market. Recent data from SEBI reveals a mixed picture of retail participation in the F&O market. While the number of unique individual investors trading in F&O has decreased compared to the previous year, it remains higher than two years ago. The study also indicates that traders with smaller turnover volumes experienced the largest decline in participation compared to the previous year, but also the highest increase in participation compared to two years ago. Furthermore, the study highlighted that the net losses of individual traders in F&O have widened significantly, with the vast majority of traders continuing to experience losses. This reinforces concerns about the risks associated with retail participation in the F&O market and underscores the need for enhanced investor protection measures. Overall, SEBI's consideration of curbing weekly expiries and implementing other measures to regulate options trading reflects a growing concern about the potential risks associated with excessive speculation and the need to promote a more balanced and sustainable market environment. The outcome of the consultation process and the subsequent decisions made by the SEBI board will have a significant impact on the Indian capital market landscape.
The proposed changes to options trading, specifically the potential reduction in weekly expiries, have sparked considerable debate within the financial community. Proponents of the changes argue that curbing weekly expiries would discourage excessive speculation and reduce market volatility, leading to a more stable and predictable trading environment. They believe that the focus should shift towards longer-term investment strategies, promoting capital formation and sustainable growth. They also point to the high percentage of retail traders who incur losses in the F&O market as evidence of the need for greater regulation and investor protection. By reducing the frequency of weekly expiries, they hope to reduce the temptation for short-term speculative bets and encourage a more informed and disciplined approach to trading. Furthermore, proponents argue that reducing weekly expiries would allow market participants to focus on fundamental analysis and long-term investment strategies rather than constantly reacting to short-term price fluctuations. This could lead to a more efficient allocation of capital and a more stable overall market environment. They also believe that the proposed changes would level the playing field for smaller investors, who may be at a disadvantage compared to larger institutional investors in the current high-frequency trading environment. By reducing the speed and complexity of options trading, they hope to create a more equitable and accessible market for all participants.
On the other hand, opponents of the proposed changes argue that curbing weekly expiries would reduce market liquidity and make it more difficult for traders to hedge their positions. They believe that weekly expiries provide valuable opportunities for short-term trading strategies and allow market participants to quickly adjust their portfolios in response to changing market conditions. They also argue that the proposed changes would disproportionately impact smaller traders and retail investors, who may rely on weekly expiries for income generation and portfolio management. Furthermore, opponents argue that SEBI should focus on improving investor education and promoting responsible trading practices rather than imposing restrictive regulations that could stifle market innovation and growth. They believe that investors should have the freedom to choose their preferred trading strategies and that the role of the regulator should be to ensure fair and transparent markets rather than to dictate how investors should trade. They also point to the fact that the Indian derivatives market has been a significant contributor to the growth of the Indian economy and that any changes to the regulatory framework should be carefully considered to avoid unintended consequences. Ultimately, the debate over the proposed changes to options trading highlights the complex interplay between regulation, innovation, and investor protection in the financial markets. SEBI faces a challenging task in balancing these competing interests and ensuring that the Indian capital market remains vibrant, efficient, and accessible to all participants. The outcome of the consultation process and the subsequent decisions made by the SEBI board will have a significant impact on the future of the Indian derivatives market and the overall health of the Indian economy.
Source: BSE, Angel One, CDSL stocks fall up to 3% as report says SEBI is considering to curb weekly expiries