The Securities and Exchange Board of India (SEBI) has announced new rules for Futures & Options (F&O) trading that will take effect from November 20. These rules come at a time when the stock market is already feeling the pressure, partly due to tensions in the Middle East. The changes primarily aim to address the growing participation of retail investors in the F&O segment, a trend that has raised concerns for SEBI in recent months.
Why New F&O Rules Were Introduced
Retail investors have been increasingly getting involved in the complex world of derivatives, and SEBI has been keen to ensure that they are protected. SEBI’s concerns stem from the high-risk nature of F&O trading, where significant losses are not uncommon, especially for inexperienced traders. After months of consultations, SEBI has now introduced tighter regulations that will impact how retail investors trade in derivatives.
What Will Change in F&O Trading?
Weekly Expiry Limitation:
One of the major changes SEBI has introduced is limiting weekly expiry trading to just one of the primary indices on a stock exchange. Previously, traders could engage in weekly expiries across multiple indices, but starting November 20, this will no longer be allowed. This change could affect traders who have relied on weekly expiries to generate profits, particularly option traders who often see significant earnings on expiry day.
With only one index available for weekly expiry, traders will need to be more selective with their trades. It also means that any losses from a single weekly expiry will hit immediately rather than being spread out over several days. While this might seem alarming to traders, SEBI hopes it will encourage a more cautious approach to F&O trading.
Impact on Retail Investors: Losses Could Increase in Short-Term
For retail investors, these changes could lead to higher short-term losses. Earlier, traders could bet smaller amounts daily in anticipation of the market moving in their favor throughout the week. Now, with the limitation of weekly expiries, a trader might lose a larger amount in one go if their prediction is incorrect.
Saket Ramakrishna, from Quick Algo, explained that while the total loss a trader faces may not increase, it will hit them more abruptly, leading to bigger single-day losses. However, in the long term, this rule is expected to create a more stable trading environment.
Changes in Minimum Contract Size
Another significant move by SEBI is increasing the minimum contract size for index derivatives. Previously, the minimum contract size ranged from ₹5 to ₹10 lakh. Now, it has been raised to ₹15-20 lakh. This change is expected to push smaller option sellers out of the market, as they will no longer have enough capital to sell options.
Experts believe this could push more traders towards buying options instead of selling them, as buying options requires less capital. However, this shift may not be entirely beneficial, as option buyers tend to face higher losses compared to option sellers.
Impact on Discount Brokers
SEBI’s new rules will likely hit discount brokerage firms, which rely heavily on F&O trading for their revenue. With stricter regulations in place, fewer retail investors may engage in high-risk F&O trades, affecting the profits of these brokerage firms.
Raghav Malik, Founder of Algo Test, explained that with fewer profit-making option sellers in the market, the percentage of traders incurring losses is likely to rise. SEBI’s data already shows that 89% of traders in derivatives incur losses, and this figure is expected to increase under the new rules.
Discount brokers, known for offering low-cost services to F&O traders, will see their customer base shrink as fewer retail investors can meet the increased capital requirements for trading.
What’s Next for Retail Investors?
While SEBI’s new F&O rules may seem harsh, they are designed to protect retail investors from high-risk trading practices that have led to significant losses in the past. The increased contract sizes and limitation on weekly expiries are meant to create a safer, more regulated trading environment.
However, retail investors will need to adapt quickly to these changes. Traders who have relied on F&O trading as a major source of income will need to rethink their strategies and possibly move towards less risky investments.
For now, all eyes are on November 20 when these rules come into effect, with both traders and brokers gearing up for a significant shift in the F&O trading landscape.
