Sebi's F&O crackdown: Who wins, who loses?

Discount brokerages are expected to see a higher impact compared to regular brokerages.

Earlier this week, capital market regulator SEBI released a consultation paper aimed primarily at discouraging individual traders from betting on futures and options (F&O).

Reason: Even as India’s F&O market has seen an explosive growth in volumes post COVID, a vast majority of individual traders and proprietorship firms are ending up on the losing side.

According to SEBI estimates, around 92.5 lakh such players lost around Rs 51,700 crore in FY23 (excluding statutory transaction costs). On the winning side of the table have been high-frequency algo-based proprietary traders and/or Foreign Portfolio Investors (FPIs).

SEBI has proposed seven measures to make F&O less attractive for small traders, of which the two most hotly discussed proposals are the increase in the minimum contract value and limiting of weekly option contracts to one per exchange.

Also Read | Lessons SEBI should learn from global markets before introducing curbs

Here’s a look at how the measures will impact all the market players and who are the biggest winners and losers from the measure:

Individual investors:

The proposed increased in minimum contract size from Rs 5 lakh to Rs 30 lakh in a phased manner, collection of premium upfront from clients, and removal of margin benefits on calendar spreads will increase capital requirements for individual traders.

As will the reduction in number of weekly options contracts. Much of the action is concentrated in expiry day contracts, that too in contracts with strike prices significantly away from prevailing market levels, available for a low premium.

NSE data for May 2024 showed that 80 percent of the traders in the options market did turnover of less than Rs 10 lakh for the month.

Higher capital requirements will most likely push many of these traders out of the game.

NSE:

Experts say NSE will be more impacted than the BSE if only one weekly option is allowed per exchange. NSE currently has four weekly expiries: Nifty, Bank Nifty, Fin Nifty and Nifty Midcap. In contrast, BSE has two weekly options contract, Sensex and Bankex.

“We see higher impact for NSE as options accounts for ~60 percent of its revenues (FY25 estimated), while for BSE it is ~40 percent. We estimate a 25-30 percent impact on NSE’s FY26 earnings and 15-18 percent for BSE,” broking firm IIFL Securities said in a report.

BSE:

The BSE too stands to lose from the SEBI proposals, as one its two weekly expiries one could be discontinued. However, in a perverse sense, BSE could actually stand to win from this measure, say some analysts. That’s because many traders who are only trading in NSE options, may start trading in BSE weekly options as well.

“For BSE, removal of Bankex weekly contract can impact EPS by 7-9% over FY25-27E. In our scenario analysis, gains from spillover of trading activity from discontinued products can offset EPS impact and in the event of moderate industry-wide impact of SEBI measures, can even drive EPS upgrades,” said broking firm Jefferies in its report.

Brokers:

Discount brokerages are expected to see a higher impact compared to regular brokerages. Regular brokers can hike prices to offset the impact, but for discount brokers, the measures will act as a double whammy, following the hike in STT in the budget. As trading volumes fall, their topline will feel the pinch. Increasing brokerage charges will only drive the pocket-conscious retail investors, who make up most of their clientele, away.

Jefferies estimated that the impact on Zerodha, Angel One, Paytm Money, and other discount brokerages will be “very high”, while traditional brokerages such as MOFSL, IIFL Securities, or ICICI Securities will see a “high” impact.

Large Traders (HNIs/FIIs/HFT algo firms):

According to Feroze Azeez, Deputy CEO, Anand Rathi Wealth, large traders could be winners of this measure. He said, “These measures are expected to lower monthly option prices, especially for OTM options. This will lead to reduced implied volatility and a more balanced option pricing skew, making the market more accessible and less risky for investors.”

While the options market may see less volatility because of reduced retail participation, it could also result in reduced profits for the large players. That is because the large players earn their profits at the expense of the inexperienced individual players, say some derivative traders.

Clearing Houses and Depositories:

They will also see an adverse impact from the proposed measures. As trading volumes fall, so will the turnover, thus negatively affecting their revenues.

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