Surge in retail trading in futures and options: Froth and risk

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In recent years, there has been a surge in stock market participation in India. At the end of 2018-19, the number of demat accounts in the country stood at 3.59 crore. By October 2021, the figure had risen to 7.38 crore and as per more recent reports, there are now more than 15 crore demat accounts. Then there are the millions who invest through mutual funds. According to data from the Association of Mutual Funds in India, investments just through the SIP route (systematic investment plan) stood at Rs 1.99 lakh crore in 2023-24, more than doubling from Rs 92,693 crore in 2018-19. All this points towards a spreading culture of equity. But, alongside this growing participation by households in stock markets, there are concerns over the sharp surge in trading in futures and options (F&O) by retail investors.

On Tuesday, Finance Minister Nirmala Sitharaman spoke on the issue, saying that “any unchecked explosion in retail trading of futures and options can create future challenges, not just for markets but for investor sentiments and also for households finances”. The surge in participation in this market segment has been staggering. In 2023, according to a study by the Securities and Exchange Board of India, the number of unique traders in the F&O segment had risen to 45.2 lakh in 2021-22, up from 7.1 lakh in 2018-19. This was based on a sample of the top 10 brokers in the country who accounted for 67 per cent of individual turnover in the F&O segment. What was equally revealing was that 89 per cent of the traders incurred losses while trading in the F&O segment. The average loss was pegged at around Rs 1.1 lakh. The SEBI Chairman had, last November, expressed surprise over people trading in this segment, despite the odds not being in their favour. In 2023, a report titled “Gamification of Indian equities” by Axis Mutual Fund had estimated the derivatives to cash volume ratio in India at 422. In comparison, the ratio was 36 in the case of Germany and nine for the US. The report had attributed the surge in derivatives trading to changes in the contract structure, higher leverage, and the ease of trading facilitated by trading apps.

In the coming years, as more individuals join the labour force, more will channel their money into the stock market. They will need to be educated not only about the workings of the market, but also about the risks stemming from various investment products. In the recent past, the stock market regulator has taken action in the case of financial influencers, asked small and mid cap funds to conduct stress tests, and spoken about froth in certain segments of the market. It must continue to place investor protection front and centre.