Moneycontrol Pro Panorama | SEBI's course correction awaited

Industry experts are urging SEBI to shift its focus from imposing blanket restrictions to offering targeted training for retail traders.

Dear Reader,

The Securities and Exchange Board of India (SEBI) has been grappling with the alarming reality that approximately 95 percent of retail options traders incur losses. In an effort to protect these traders, the market regulator has taken several measures to curb excessive trading.

Among the most significant changes was the reduction in expiries for various index options from five to two, a decision spurred by the observation that over 90 percent of trading volume occurred on expiry days at the NSE and the BSE. Increased margins and higher lot sizes accompanied this measure, all intended to discourage speculative trading.

However, the unintended consequences of these measures have been profound. They have led to a drastic decrease in trading volumes that has adversely affected all stakeholders, including the exchanges themselves. With legitimate trading volumes dwindling, many traders have resorted to underground operations, as evidenced by the rise of "bucket shops" or Dabba trading. Additionally, fewer expiries have resulted in higher intraday volatility, creating a challenging environment for anyone involved in trading.

Recognising that excessive regulation has complicated market dynamics, SEBI has recently issued a consultation paper seeking feedback. Despite having previously sought input—only for the recommendations to be overlooked—this latest effort appears to echo a similar sentiment.

Industry experts are urging SEBI to shift its focus from imposing blanket restrictions to offering targeted training for retail traders. Training could properly educate traders about the risks associated with derivatives and enhance their decision-making abilities.

In many developed markets, stakeholders must clearly understand the risks before they access trading platforms. While this initiative is a step in the right direction, it's essential to acknowledge that training alone cannot guarantee profitability. Experienced traders assert that mindset and effective risk management contribute over 80 percent of their success. In contrast, product knowledge and strategies make up less than 20 percent.

Moreover, restricting expiries could hinder product innovation within the exchanges and increase volatility, especially as expiry dates approach. Such changes also raise trading costs for professional traders who must adjust their algorithms and risk management strategies, potentially dissuading investments by foreign trading houses—an area critical for India's economic growth.

Traders form the backbone of the stock market ecosystem, yet regulators often adopt a theoretical understanding of trading that can overlook the intricate realities of the marketplace. While SEBI's consultation papers indicate a willingness to listen, past instances show that many valuable suggestions have been disregarded. This has resulted in successive calls for the status quo to remain intact. If SEBI genuinely aims to safeguard retail traders, it should prioritise their education and preparedness, ensuring they are fully equipped to navigate the complexities of financial markets.

Analogously, trading resembles driving: one must acquire a licence after undergoing training, but even a licensed driver is not immune to accidents. Trading being a zero-sum game will always see some traders suffer losses.

SEBI's role should not be to shield certain traders but to ensure the smooth functioning of the market while empowering all participants to make informed decisions. It is high time for regulators to embrace a more nuanced understanding of trading dynamics and foster a market environment that prioritises education and responsible trading practices.

Investing insights from our research team

ICICI Bank — Will the re-rating continue?

HDFC Bank at an inflection point after consolidation in FY25

Can this IT company rebound in FY26 after a tough FY25?

What else are we reading?

Data Story | How Wipro fell behind Infosys, TCS in Europe

Two biggest private banks face a slowdown, but also show resilience

Personal Finance: The big market risk investors ignore near their retirement

Chart of the Day: On a slippery road

The Eastern Window: Is China's control over rare earth weakening Trump's bargaining power?

Ruchir Sharma: Mapping the high tariff world (republished from the FT)

‘Anti-fragile India’ is set to emerge stronger in a chaotic world

Indian banking’s held back by inadequacy of long-term funding

Karnataka’s caste survey opens up a Pandora’s Box for the polity

Who is the true heir of Ambedkar’s legacy?

Markets

Asia chasing Asia: Japan, Korea lead the way in Nifty-tracking passive funds

Tech and Startups

Cyclical or Structural? IT majors' slowing growth in FY25 raises tough questions

Technical Picks: MCX, BDL, PAYTM

We have a crack team of reporters writing on everything startups and tech. We are fans of their newsletter Tech3 that lands in our inboxes every weekday evening. You can catch up on the day's happening tech and startup stories, including news, scoops, and analyses. If you have not already subscribed to it, click on this link to sign up. Thank you for subscribing to Moneycontrol Pro. Check out our offers page here for exclusive discounts on select brands and giveaways.

Shishir Asthana Moneycontrol Pro