SEBI proposal to tighten index options limits may dent expiry-day trading volume, as prop traders will be more watchful

SEBI proposal to tighten index options limits may dent expiry-day trading volume, as prop traders will be more watchful

The Securities and Exchange Board of India’s proposal to alter position limits in index options is expected to significantly change trading behaviour, particularly on expiry days, and reducing concentration of turnover on expiry-days, traders said.

Under the proposed framework reported exclusively by Moneycontrol on August 19, the intraday monitoring threshold for index options will be raised to Rs 5,000 crore (net delta exposure) from the current Rs 1,500 crore, while the overall gross ceiling remains capped at Rs 10,000 crore. Crucially, the proposal makes it clear that limits breached on expiry days will attract penalties, a move aimed at curbing the sharp, concentrated bets that dominate expiry-day trades.

Market participants say this will redistribute liquidity rather than shrink it—participation could be better on non-expiry days while volumes could take a hit on expiry days. Rupak De, Senior Technical Analyst, LKP Securities, said the clampdown is squarely aimed at the expiry window and that penalties for breaches “will reduce the volume on expiry days.”

Analysts highlighted that while the effect might be most visibly on the top 1% of clients, they are also the contributors of the exchanges' big chunk of turnover. There could be a 15 to 20% hit to this turnover. Mainly, large proprietary firms may be more watchful of their volumes on expiry-days. Besides, traders said there could be a near-term wobble, with volumes from arbitrageurs and market makers taking a hit on expiry-days.

On non-expiry days, De noted, the higher Rs 5,000-crore intraday limit gives more room for HFT and portfolio traders, bringing “more bidders on non-expiry days.” But this will need to be watched.

On the positive side, De expects the expiry-day theatrics to cool: “On expiry we often see sharp swings on either side — people take a long straddle and wait for a lottery-type move. These things will be controlled. Volatility will be reduced, manipulation lowered.”

Better market hygiene

“Obviously Sebi is trying to curtail manipulative activities. Some players, with their capital and size of bets have the ability to move the markets. But with these position limits and penalties, the playing field becomes more regulated, more democratic, and no one player can have a massive impact,” said Nilesh Sharma, ED and President at Samco Securities.

Besides, Sharma said, SEBI has changed the way exposure is counted under this likely intraday limit. Earlier, total position was calculated using notional/turnover; now it is on delta, giving higher weight to in-the-money options than far OTM. “They want higher volumes and participation, but with checks that prevent manipulation,” Sharma said.

Some analysts anticipate monetary penalties and increased compliance costs for brokers and exchanges, potentially passed on to clients.

READ MORE: Sebi mulls double-edged move: Higher intraday limits, with expiry-day clampdown and penalties for breach

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