The Securities and Exchange Board of India (Sebi) has unveiled a slew of measures to clamp down on speculative trading by investors in the futures and options (F&O) market. To start with, contract sizes will stand tripled from about ₹5 lakh to ₹15 lakh.
This would mean a corresponding increase in margin money to be put down right away. Instead of settling the options premium at the end of a contract, it will now have to be paid upfront.
This will push out traders who don’t have the requisite funds but make bets anyway in the hope that fortune will favour them and they won’t need to pay.
The number of contract expiries will be slashed to just one benchmark per exchange, ending a multiplicity that was attracting speculators. Further, there will be intraday monitoring of position limits to reduce the scope of breaches going undetected.
Also, the market regulator is drawing curtains down on a calendar-spread game that involves the purchase and sale of options on the same underlying security at the same strike price but with different expiries.
Some speculators have tried to make a quick buck by carrying out trades on expiry date, when volumes tend to surge and time risk is the lowest. That opportunity will be gone.
All in all, it will get costlier to speculate in derivatives. In effect, this should sort out the F&O market, so that its participants are investors who need these tools to hedge genuine positions.
While a broad case for wide open markets is often made on the argument that efficiency rises with widening participation, India has seen a frenzy of speculation with tools in the hands of those who scarcely understand the risks entailed. This is borne out by Sebi’s survey data on F&O trading losses.
A recent study showed that over the past three years, more than 93% of retail F&O traders had lost money, with a collective hole of ₹1.8 trillion burnt in their pockets. That derivatives have attracted so many people testifies not to a new savviness, but a rising appetite for risk.
This frames the context for Sebi’s widening of investment avenues. It has not only lowered barriers for mutual funds (MFs) to enter the arena, but opened a novel avenue for investment via an asset class that will straddle the market gap between MFs and portfolio management services.
Aimed at those ready to take a relatively risky path, but with experts taking these risks, this product is designed to attract money for its operator (or fund house) to deploy on riskier market strategies than MFs are allowed to.
Such a fund could focus on buy-sell shorts, for example, which regular MFs are barred from. This new asset class will require ₹10 lakh as the least an investor must invest. This is a fifth of the minimum it takes to sign up for portfolio services, but also much more than the mere ₹500 needed for MF entry.
Given the current scenario, this hybrid could offer a new risk-reward package to suit a significant slice of our fast-expanding base of retail investors.
Sebi will doubtless be watching F&O trading volumes for signs of its strictures taking effect. If they end the casino-like air that hovers over this activity, it would make our markets and investors less vulnerable to turbulence brought about by reckless participation.
More traders in a market ought to mean more views being blended in, but everyone needs to be well informed for that to create signals instead of noise. As with the new asset class on its way, some things are best left to experts.