Hike in STT on F&O trades a dampener, impact to be felt with a lag, say traders

Benchmark indices Sensex and Nifty turned red, falling over 1 percent each immediately after the announcement.

In what is widely viewed as a move to discourage retail traders, Budget 2024 raised the securities transaction tax (STT) in the futures and options (F&O) segment .

STT on the sale of an option in securities has been hiked from 0.0625 percent to 0.1 percent of the option premium, and on the sale of futures in securities from 0.0125 percent to 0.02 percent of the price at which such futures are traded.

Sheersham Gupta, Director and Senior Technical Analyst at Rupeezy, noted that the increase in tax on F&O and capital gains in today's Union Budget indicates that the government aims to encourage retail investors to shift away from speculative activities.

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"On average, the 60-65% increase in STT could lead to an additional Rs 45 to 50 in STT for a Nifty futures contract. While this might slightly reduce futures and options (F&O) trading, it is not expected to cause a significant overall change. However, it is likely to have a noticeable impact on very short-term trading activities, such as scalping or intraday trading," said Gupta.

May Trigger Changes in Strategy for Algo traders

Rajesh Srivastava, a derivatives trader, believes that F&O traders, particularly those into algorithm-driven trading will need to fine tune some of their strategies as every trade will incur an additional cost.

"It will affect algo trading strategies due to reduced liquidity, which leads to higher impact costs. Our strategies consider the cost at a certain point. For example, if my Bank Nifty options cost is 6 points, I have to add a few points. Thus, the strategy has to be very low cost for long-term viability," added Srivastava.

The market shrugged and took the announcement in its stride, as well as the higher taxes on long term capital gains and short term capital gains, and recovered from the day's lows even as benchmark indices closed in the red.

"You will see continued downtrend momentum tomorrow. Last year, there was an increase in STT, and we closed 0.20% down, but the following week it fell by 1.5%. The impact is always felt on the second day," he said.

Santosh Pasi, another derivatives trader, said, "The STT increase is disappointing news for derivative traders. While it will add more to the government's tax revenue, it won't impact the volume of derivatives trading significantly, as many new traders are regularly entering our market. Professional traders will be more cautious, potentially reducing volume marginally or shifting to more positional trades instead of intraday trades."

Rise in Positional Trade Volumes Expected Compared to Intraday

"Our country is developing, and we will see a further increase in volumes of both equities and derivatives. Positional trade volumes might increase while intraday trading will reduce," added Pasi.

Arun Kumar Mantri, Founder of Mantri Finmart, said, "Yes, it will be a short-term sentiment dampener, but in the long term, the markets will digest this news, and the broader markets will settle within the next 7-10 days. There has been an initial reaction, and it may continue for a few more days, but we expect the markets to stabilize with positivity in the medium to long-term perspective."

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