SEBI's proposed F&O curbs stoke fears of spike in dabba trading

Dabba Trading's appeal lies in its lack of upfront margins and evasion of taxes.

Market regulator SEBI's proposed measures to discourage individual traders from betting on futures and options (F&O) is fuelling concerns that these traders may shift to informal channels like dabba trading or even to gambling sites.

Dabba trading

Dabba trading is an illegal practice where trades are done outside stock exchanges. The deals are settled by the person running the dabba operation, and allow traders to bet on share prices or indices without a trading or demat account, or KYC details.

The dabba operators act like bookies, accepting bets and paying out or collecting based on which way the price has moved. Dabba Trading's appeal lies in its lack of upfront margins and evasion of taxes.

Veteran traders claim it has grown larger than the official market due to a booming stock market and various regulatory, technological, demographic, socioeconomic, and cultural factors.

Alternative market

Atul Parakh, CEO of Bigul, believes that SEBI’s proposals, such as the one to increase the minimum contract size value, will lead to a decrease in the number of retail participants. "This could drive up volumes in dabba trading as retail traders may switch to that for short-term gains,” Parakh told Moneycontrol.

“I agree that a few points in the SEBI proposal were good, but implementing all might raise concerns," he said.

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Unintended consequences

Veteran investor Ajay Bagga believes that higher taxes and margins will cause informal networks to mushroom, offering no tax, low-margin trading.

"Already there are a huge number of illegal FX trading apps that cheat investors. Similarly, small investors will seek some non-regulated F&O trading alternatives, most of which will end up making them lose their entire investment," he said.

According to Bagga, in a clean, quick, and efficient market like the primary market, IPOs are getting a huge response, largely on the expectation of listing gains. The funds are there, the investors want to invest and want to get returns. Through education and regulatory nudges, more investors need to be guided towards long-term, diversified investments, such as mutual fund SIPs.

"Changing investor behaviour is a difficult task that needs to be thought through with a lot of focus on education, ease of investments, and offering products that keep pace with investors' requirements and aspirations," he said.

Second order impact

“The immediate impact of SEBI curbs will be severe, as derivatives are zero-sum trades," noted technical expert Dinesh Nagpal. "Retail traders are increasing their activity, but they rely on supply from prop desks, FIIs, and DIIs.

DIIs support this bull trend by hedging their long-term investments. It’s like an ecosystem—if one part is removed, others will suffer. Initially, we might see profit booking, but DIIs may not buy in as much due to reduced hedge potential."

Nagpal is not sure if retail traders pushed out of the F&O market will take to dabba trading in a big way, as it is not accessible to everyone and has many flaws. “Those losing in regulated markets will lose even more in unregulated ones, due to the absence of margin limits,” he said said.

“In a free economy, speculation is fine if profitable, but with 90% losing, it resembles gambling, leading to debts, asset sales, and health issues, he said.

"If traders are restricted from F&O, they might just shift to the cash segment, which doesn’t solve the problem. Initially, we may see a drop in volumes and a rise in unregulated activities, but within a quarter or two, the market will stabilise with more knowledgeable and profitable participants remaining," Nagpal told Moneycontrol.

Also read | NSE cautions investors against entity offering guaranteed returns

SEBI's measures are likely to curb excessive speculation by increasing the cost and complexity of trading in the F&O market, deterring less experienced retail investors, according to Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited.

"Some may be tempted by dabba trading, but a major shift toward this risky and fraudulent activity is unlikely," he said.

No impact

Rohit Shrivastava of Indiacharts believes SEBI’s F&O curbs might not significantly boost dabba trading. "Unregulated trading has been around for years; those inclined will continue regardless so it would be misleading to say that this issue will make it prosper. The higher contract sizes and margins might restrict some options trading, but not drastically impact volumes," he explained.

"Instead of Rs 8,000 to buy one lot, you will need Rs 30,000 to buy one lot, but that will not cause an 80 percent decline in volume. Most people will adjust and bring in more funds. Option selling has historically been the foray of large prop desks, and that will remain. They provide liquidity on the other side of the trades and there is no dearth of capital," Shrivastava told Moneycontrol.

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