How will lot size increase affect trader and brokers?

Read this on Zerodha FB post:

Lot sizes revised upwards on both index and stock derivatives. Nifty lot size goes up from 25 to 75 from Nov contracts https://zerodha.com/marketintel/Circulars/

Also read somewhere that most brokers will not be able to survive.

Can someone tell me how it will affect brokers and traders.

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Trader

Those taking trades currently more than 3 lots or 75 Nifty at a time, life doesn't really change for them at all.

Those taking 1 lot or 25 of Nifty per trade putting up a margin of around Rs 20k, will be forced to minimum take a position of 75 Nifty by putting up Rs 60k as margin. The issue with increase in margin is that some people would not have enough money to trade nifty futures anymore, and those who have may not be comfortable taking much bigger risk on every trade. 

Much bigger risk because now every point up and down could mean profit/loss of Rs 75 instead of Rs 25. All charges would go up proportionately as they are all % based. (if you are trading at Zerodha, since brokerage is flat 20, brokerage won't get effected). 

Those traders who don't have money, might move to trading options. Trading options is much more riskier, and most retail don't really understand this product very well in terms of risk. If a trader was trading with 1 lot of Nifty using 25k, a 100 point move against him would have meant Rs 2500  loss. Buf if the trader bought an ATM or OTM option for the same 25k, and market moved against him the potential loss is the entire Rs 25,000. 

Don't think the affect on Nifty F&O will be much, what will definitely take a hit will be stock futures where the liquidity is already quite low, and the increased contract value will substantially increase the margin required to trade a few of them. Also many retail traders participate in stock futures with 1 lot per trade currently. 

Broker

Traditional brokers charge per lot fees for trading options. So an icicidirect currently would be charging Rs 100/lot or Rs 100 for every 25 nifty options bought. When the lot size goes upto 75, they will now be forced to charge only Rs 100. So the revenue yield for them for a 75 or 3 lot Nifty trade will drop from the current Rs 300 to Rs 100. 75% of the business is currently options, so traditional broking firms will definitely take a big hit in revenue. 

Discount broking firms run on per trade fees, and the business composition is mainly retail traders. If because of the margin increase, number of trades drop, it will hit the revenue. For discount brokers 90%+ business comes from F&O, and this could mean a big hit for revenues in a surrounding where already most are struggling to stay profitable. Only the ones with scale, will probably continue to operate this model in the long run. 

But yeah, like everything change is tough to deal with. We will all get used it in a while, but this one has the potential to change the dynamics of F&O business in India, for good and for bad. 

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Gone case! Sebi has played a spoilsport by trying to curb speculation in F&O by retail traders. Thank god, they hv atleast spared the banknifty to some extent.

About Equity F&O, retail traders hv to forget abt them as the lot size has got increased by 80%-1000% on an average. Just for the KICK -> Lot size of AdaniEnt has got increased from 500 to 5700!

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Now a days SEBI doesn’t have any business. They are just there to help the big brokers. If they were so concerned about the risk of retail traders they would have sticked on with 25 lot which i feel was really good for retail traders. People like Nithin has to take up the matter with SEBI so that we retail people can get some good news. We are all in the learning process of trading so this decision is going to affect badly and at the ead of the day we will have to be very very careful in our trading decisions. So in total its bad for retail traders and for brokers.

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Can’t the brokers protest and take this up with sebi?

Alternatively, people who trade nifty and bank nifty can trade the index through niftybees and bank bees. These securities tend to replicate the indices. So people with lower risk apetite do not need to risk more by entering into buying futures on the indices and risking their money at once. :slight_smile: Hope this helps for traders who seek to trade the derivatives market.

Trader's investment increases and broker's brokerage also increases with it. However traders trading with a solid intraday strategy need not bother.

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This hike is just stupid, speculators will trade any lot size if they are greedy enuf, this will only curb the option for a retail investor hedge against his/her delivery position by a future contract when the market get a bit tricky. basically that's why derivatives are even there.. To promote investment they should reduce lot size  not hike it.already we Indians are damn scared of the market this hike has just put fear in amateurs such as me too. in the old days i would have no problem trading futures but now i am switching to commodities.when stocks like  Aditya Birla NuvoCrompton Greaves ,Dr Reddys Laboratories, LT, INFY, move 10+% in a day coz of news, what will investors do when they are in the wrong side of the futures contracts, which retails investors always will be.One loss like that and no wonder they say market is gamble, one loss like that can wipe their whole capital and also these are not some small stocks they all are top of the line large/mid cap stocks. 

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But then, brokers like ICICI will earn from futures transactions right, as their brokerage is percentage of traded value? I think this will benefit them in a huge way!

Today 75 to 80% of the market is options. Also the futures business will mostly reduce because of the increased margins.

It could also consolidate the broking industry which is currently in decline due to "easy " entrants, remisiers, and sub agents. The industry consolidation ensures professionalism, quality augmentation and bargaining power. Once the small players leave the stage /and /or merged with bigger ones , the industry might propel frictionless.