Moneycontrol Pro Panorama | Market participants must heed the Finance Minister's warning 

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Finance Minister Nirmala Sitharaman has joined the market regulator SEBI and other experts in warning against a potential surge in the retail futures and options segment. Speaking at the BSE's Viksit Bharat event on Tuesday, Sitharaman said, "Any unchecked explosion in trading of retail futures and options can create future challenges, not just for the markets and investor sentiment, but also for household savings that have made the generational shift."

The minister's caution is valid—excess in any form is detrimental. India's options market is among the largest globally, accounting for 78–84 percent of all equity option contracts traded worldwide in 2022–23. In 2023, India traded 85 billion options contracts, the highest volume in the world. The National Stock Exchange (NSE) handles over 93 percent of these transactions.

However, a closer examination reveals that over 90 percent of the derivative volume is in index-based options, with the highest volume (nearly 95 percent) on the options' expiry day.

The higher volume on expiry day is because of the fact that, unlike other instruments where the end-of-day price is uncertain, all out-of-the-money options become worthless in zero-day to expiry (0DTE) options. Both institutional and retail traders are drawn to this predictability. As 0DTE volume increased, larger players entered the market, using their financial power to deploy strategies in a crowded space, causing market spikes.

There was significant concern when data showed the profits made by a foreign trading firm in India. However, market manipulation by powerful players is a global issue, and increased liquidity makes such manipulation more challenging.

While SEBI and the finance ministry advocate retail traders, exchange data shows that retail traders account for only 35 percent of options volume.

A SEBI report paints a grim picture, indicating that only one in 10 traders succeed. If a trader persists despite repeated losses, it signifies a gambling instinct akin to addiction. These traders become easy prey for professional traders, highlighting the potential risks of excessive trading in the retail futures and options segment.

While the warnings are well-meaning, it's also important to realise that derivative markets perform a necessary hedging function that may help investors in the event of a market crash.

Meanwhile, exchanges are focusing on profits and launching new weekly indices for the derivative markets. They have implemented sufficient security measures to prevent systemic risks from sharp market movements.

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