SEBI’s New Derivatives Framework To Hit Zerodha Trades By Nearly 30%: CEO Nithin Kamath

Zerodha cofounder and CEO Nithin Kamath expects trades on the online broking platform to decline by as much as 30% on account of the Securities and Exchange Board of India’s (SEBI) new derivatives framework. 

In a post on X on Thursday (October 3), Kamath said that the regulator’s new directives, such as one weekly expiry of index derivative per exchange and rise in contract sizes, will also likely impact nearly 60% of “overall” futures and options (F&O) trades.

“Here’s the potential impact of only one weekly expiry of index derivatives per exchange and contract sizes going up by around 2.5 times. As things stand, assuming that those trading weekly don’t move on to trading monthly, the impact will be ~60% of overall F&O trades and ~30% of our overall orders,” said Kamath. 

This comes a couple of days after the market regulator introduced a slew of new measures to crack the whip on the overheated Indian F&O market. 

The new mandates include upfront collection of option premiums from buyers, limiting weekly expiry derivatives to just one benchmark index per exchange, increasing the minimum contract size for index derivatives to INR 15 Lakh, among others. 

The new rules will come into effect from November 20. 

Meanwhile, the BSE will discontinue weekly index derivatives contracts for Sensex and Bankex from November 14 and November 18, respectively. 

Despite his projections, Kamath expects things to become “much clearer” post the November 20 deadline, when the new rules will come into effect. He added that Zerodha will then revisit its pricing structure on the basis of the impact of the new norms on the company’s bottom line. 

“I guess things will become much clearer from November 20th. We will then decide on our change in pricing structure, based on the impact on the business,” read Kamath’s post on X.

The comments echo the larger concerns among industry watchers. The six-pronged framework has been envisaged to crack the whip on derivatives markets and deter retail investors from engaging in F&O trading. As per reports, trading volumes in India’s F&O segment could tank by as much as half once the new norms kick in. 

The SEBI crackdown comes at a time when market experts have flagged the F&O market as an avenue for losing money rather than “a newfound path to quick riches”. A SEBI report said that 93% of traders in the F&O segment lose money, and added that these traders keep returning to the market to make a quick buck despite burning their money before. 

Such has been the clamour that SEBI chairperson Madhabi Puri Buch, earlier this year, said that the market regulator was open to taking “some derivative products” off the market as the country was in the middle of a period of excess options trading. 

Subsequently, in July this year, the regulator floated a consultation paper seeking stakeholder feedback on seven recommendations to overhaul the index derivatives framework, with an eye on increasing investor protection and market stability. 

Two months later, the regulator finally drafted six recommendations to rein in the overheated derivatives market in India and curb the F&O mania. 

Earlier this week, SEBI’s uniform fee structure also came into effect, which, as per credit agency ICRA, is expected to weigh heavily over the profitability of online broking players such as Groww, Zerodha, Upstox.