Farewell: Bank Nifty's popular weekly expiry contract bids adieu amid Sebi's new F&O rules

Bank Nifty weekly contract has been an attractive choice for retail traders due to its affordability and high turnover

India's most popular derivatives contract bid farewell on Wednesday, ending an era that saw millions of small investors flock to the Bank Nifty weekly options since its launch by the National Stock Exchange (NSE) in 2016.

Trading of the popular weekly options contract ended ahead of new, stricter regulations from the Securities and Exchange Board of India (Sebi) that take effect next week to curb widespread retail trading. Sebi’s new measures, also aimed at fostering market stability, will see only one weekly expiry allowed per exchange.

NSE has retained the Nifty 50 weekly, and discontinued the Bank Nifty weekly. Bank Nifty monthly derivatives contract continues. The end of weekly contracts other than Nifty would also eliminate one expiry per day of the week from the calendar.

In the first half of FY25, Nifty Bank had the highest share of 38 percent in terms of premium turnover in the derivatives market. Nifty was second with a 28 percent share, followed by BSE Sensex at 7 percent and BSE Bankex at 3 percent, according to IIFL Research.

These changes are expected to impact trading volumes and could alter trading behaviour, with experts forecasting both immediate and long-term shifts. “The final rules were less strict than expected,” Sudeep Shah, Head of Technical and Derivative Research at SBI Securities, had said immediately after Sebi tightened F&O rules in October.

At the time, he anticipated a knee-jerk reaction in the market as traders unwound open positions. Shah added that the end of daily expiries could help moderate volatility by reducing speculative trading activity in index options, especially on expiry days. The shift back to a structure of Nifty weekly and Bank Nifty monthly contracts is similar to the market setup seen in 2019.

While larger traders are expected to adapt to the new requirements, including higher upfront margin collections, increased lot sizes, and the removal of calendar spread benefits on expiry days, the regulations may present challenges for retail participants. Lot sizes will triple, from Rs 5 lakh to Rs 15 lakh, raising barriers to entry for smaller retail traders.

Rajesh Palviya, Senior Vice President at Axis Securities, said then that the higher trade costs could prompt high-frequency traders to modify their strategies and reduce their exposure, especially as finding retail traders to take counter trades becomes more difficult.

Rishi Kohli, Managing Partner and Chief Investment Officer at InCred Capital, also foresees trading volume shifts, with a portion likely moving to Nifty 50 weekly options, Nifty Bank monthly contracts, and some single-stock options, as reported by Bloomberg today. However, he said that a part of the trading volume may “simply disappear” as some traders exit the derivatives market.

The NSE's Bank Nifty weekly contract has been an attractive choice for retail traders due to its affordability and high turnover, making it a primary driver of options trading growth. In the first half of FY25, Bank Nifty accounted for 38 percent of premium turnover in India’s derivatives market.

However, Sebi’s study of trading patterns revealed that retail traders incurred significant losses in these high-risk trades. The data indicated that only 7.2 percent of individual F&O traders made profits over the last three years, with the rest collectively losing Rs 1.81 lakh crore from FY22 to FY24.

The impact of the regulatory changes could be significant for brokers as well, particularly those reliant on derivative trading volumes. Brokers like Zerodha Broking, with a high volume of futures and options trades, estimate that 60 percent of their derivatives trading activity may be affected. NSE’s Chief Executive Officer has also noted that the exchange expects a “substantial decrease in derivatives volume” following the new rules.

Smaller traders, meanwhile, may shift their strategies toward stock-based options or margin trading facility (MTF) products, which still offer leverage with relatively lower entry costs. In the long run, experts suggest that Sebi’s measures could reduce market volatility and encourage a gradual shift from speculative F&O trading to cash equity investments, aligning with broader goals of fostering long-term wealth creation.

“While there could be some knee-jerk reaction in the short term, these measures may have a positive impact over the longer term,” added Shah, who sees these steps as encouraging retail traders toward equity investments that promote sustained wealth generation.

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