Budget 2024: FM urged to hike STT on HFT F&O trades to shield retail investors

Asset managers have suggested that a higher STT on HFT algo firms will slow down their activity.

Capital market participants have suggested increasing Securities Transaction Tax on algo-based hedge funds conducting High-Frequency Trading (HFT), among steps to shield retail investors from potentially heavy losses in Futures & Options trading.

The recommendation was made by asset management companies’ executives who met Finance Minister Nirmala Sitharaman on June 20, ahead of the upcoming Union Budget 2024, reported CNBC Awaaz, citing unidentified sources.

The suggestions included levy of a higher STT on investors with F&O turnover above Rs 1,000 crore, the report said, adding that this is to ring fence retail traders from excessive F&O speculation and losses.

“Higher tax incidence will slow down their (HFT firms’) activity, and they will make lesser profits. Their profit is retail traders’ loss. If one is reduced, the other will also get reduced,” said an asset manager present at the meeting.

Also read: BSE shares fall as govt said to be mulling higher taxation on F&O transactions

Of late, India has seen a phenomenal rise in retail participation in the derivatives market, ringing alarm bells among the government and regulators, who worry about widespread losses if the markets were to crash.

Amid this concern, the industry presented a case to the Finance Ministry to raise the STT on HFT investors with high F&O volumes. Note that this could raise the cost of doing business for large firms such as Jane Street, Millennium and others, who earn billions of dollars using custom-made algo strategies for trading derivatives in Indian markets.

Of late, large algo trade executions by such firms have been cited behind surprise spikes in option prices, triggering stop losses, causing massive loss to other option traders -- mainly including retail.

Such large trades, informally known as injections, are often meant to hunt for maximum concentration of stop losses, and trigger the same to cause a short term spike in option prices -- causing losses to such option writers, but huge profits for buyers.

The government has repeatedly voiced concerns about the increasing retail participation in the derivatives segment. Authorities fear a significant loss of wealth among retail derivatives traders if the markets were to crash.

The number of F&O traders in India surged five-fold from FY19 to FY22. Data from the Futures Industry Association shows that India's National Stock Exchange (NSE) and BSE are the top two stock exchanges globally in terms of the number of derivatives contracts traded. Together, these exchanges account for nearly 85 percent of the global volume.

In May, Finance Minister Nirmala Sitharaman warned that the rapid increase in retail F&O trading could negatively impact investor sentiment and household finances.