SEBI Floats Paper To Clamp Down On F&O Trading; Online Brokerages To Take A Hit

Online brokerages are likely bracing for a major impact on their revenues as the Securities and Exchange Board of India (SEBI) has further ramped up efforts to curb the futures and options (F&O) mania in India.

On Tuesday (July 30), the market regulator floated a consultation paper outlining seven recommendations to overhaul the index derivatives framework in a bid to increase investor protection and market stability. 

The suggestions include several changes to the existing system, such as upfront option premium collection, enhanced monitoring of position limits, increasing minimum contract sizes for F&Os, abolishment of calendar spread benefit, among others. 

The markets regulator has sought feedback from industry stakeholders, investors and the general public on the draft paper by August 20. Post that, SEBI will look at issuing final regulations. 

Before delving into the impact the latest draft norms will have on the homegrown investment tech space, let’s take a look at the seven suggestions made by the markets regulator:

1. Strike price rationalisation for options: Strike price intervals are to be distributed 4% around the index price. The interval will be increased to 8% as strikes move away from prevailing prices. 
2. Upfront collection of options premium: Upfront collection of options premiums, which is the fee that the buyer pays to the seller for the right to buy or sell a share, by sellers. 
3. Removal of calendar spread benefit on expiry day: Calendar spread position, buying and selling an option at the same strike price either in short term or long term to be struck out for positions involving contract expiration on the same day. 
4. Intraday monitoring of position limits: Position limits, a limit set by stock exchanges on share or options holding, to be monitored on an intraday basis as against the current procedure of evaluation at the end of day. 
5. Minimum contract size: SEBI has proposed the revision of minimum contract size for index derivative contracts in a phased manner. Under Phase 1, which will span a period of six months post the implementation of the draft norms, the F&O lot sizes will be set in the range of INR 15 Lakh to INR 20 Lakh. After that, Phase 2 will kick into effect and the lot sizes will increase to INR 20 Lakh to INR 30 Lakh. This translates to increasing the minimum quantity of shares that one can buy or sell as per terms of the contracts in a phased matter.

6. Rationalisation of weekly index products: Weekly options to be provided on a single benchmark index of an exchange. 
7. Extension of margins for contract expiry: Extreme loss margin (ELM), which is the additional margin charged by exchanges, to be increased by 3% at the start of the day before expiry day and 3% further on the day of expiry of the contract. 

While the recommendations are yet to be debated, they are expected to weigh heavily on online brokerage firms. For context, investment tech platforms such as Zerodha, Groww, Angel One, Dhan derive a large part of their revenues from F&O trading. 

Industry sources recently told Inc42 that F&O and intraday traders account for more than 80% of user growth and revenue for Zerodha, Groww and Angel One. 

Proposed Rules To Affect Volumes

Commenting on the development, Zerodha cofounder and CEO Nithin Kamath said that the draft norms will have an adverse impact on future trading and not so much on options trading. 

Citing trading patterns on Zerodha, Kamath, in a post on X, said that while futures traders are profitable 50% of the time, options traders are only profitable about 10% of the time. 

“If the intent is to reduce speculation, then the solution is maybe to make it harder for non-serious people to trade by having a product suitability framework,” he said. 

Meanwhile, Fintrekk Capital founder Amit Kumar told Reuters that the proposed changes will “bring down retail volumes on options, hit many high frequency traders and people who use algorithms for trades as well as exchanges”.

Additionally, the proposed mandates are expected to increase regulatory compliance and tax burden for these tech platforms, which may inevitably be passed on to the end customers.

SEBI’s latest draft rules are part of its larger crackdown on F&O trading. On July 1, the markets regulator barred market infrastructure institutions from offering discounts based on trading volumes or activity of its members to tackle the massive surge in futures and options trading. The move is likely to bring an end to the zero-brokerage facility. 

The regulator justified its crackdown in a research paper later. “For FY24, 92.50 Lakh unique individuals and proprietorship firms traded in index derivatives segment of NSE and cumulatively incurred a trading loss of INR 51,689 Cr…Further, of these 92.50 Lakh unique investors, 14.22 lakhs investors made net profit, that is, approximately 85 out of 100 made a net trading loss,” it said. 

The investment tech ecosystem also received another jolt after the Union Budget hiked capital gains tax (LTCG), and securities transaction tax (STT) on futures and options trading.