Am telling you secured loan is not as secure as you think. Well, you say bank will check your creditability before sanctioning loan along with collateral. Right. So if business fails, you lose your collateral too.
In trading at least only the money that you have is lost. Not your house and Jewellery.
Anyways. I am not for or against traders. I don’t even consider myself a trader. But in my opinion everybody should have the freedom to do what they want.
Thanks for your opinion.
Let us stop all forms of loans (student education loans, housing loans, vehicle loans, loans to farmers, loans to businesses) because they are all some form of leverage.
How do you think value addition happens, you think facebook and google actually has assets worth trillion of dollars, value is in perception, in most businesses money just changes hands, you pay a business and they give you service or product, in trading we pay the risk and receive the reward, the principal is the same, even in ordinary business you need some kind of edge to sustain in long term, same as trading, trading without edge is gambling, and in that case all your points are valid.
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You should place your argument with the Taxman who defines FnO trading as business activity. IMO traders provide the critical service of liquidity risk mitigation.
Over 90% startups also fail. So are u saying no one should start a business ? Over 90% who try to be a professional sportsman, artist, CA, scientist etc also fail. So are u implying that no one should venture in to it ? After all its my money that am putting on the line. I guess I should have the freedom to deploy my cash however and wherever I deem it to be fit.
K. SEBI is likely to disappoint you for the time being at least.
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While exchanges are ready to increase trading activity
There are 2 aspects to this as per this article - see here
- 9 out of 10 individual traders lost money in FY19 to FY22
- Govt. disincentivise retail participation in F&O by hiking STT
Both the reasons are too immature by the people who have done the research.
For point no:1 - Is there any financial market in the world where more than 10% retail traders are profitable? When retail traders go against the institutions with a bigger talent pool, super computers & mathematical models - the failure rate is quite normal.
For point no:2 - hiking tax will not deter someone from using a product. Cigarettes & Alcohol are the perfect example.
For this point - its again a dichotomy. If full time traders are not making enough money as per point: 1 - how will extended trading hours encourage office goers to do trading part time work?
If the broking industry sees so many restrictions like curbing retail for trading etc, their operational and compliance costs will go up (which will get passed on to customers) and ruin this sector.
I have seen how taxes & reforms have damaged the Indian Textile Industry. Hope it does not happen to Fintech and Financial services.
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Small difference.
My statement is about ‘adding value to society’ not about ‘adding value to capital markets’
Also, i am curious to know,
How my trading in F&O helps investors in equity with liquidity?
‘Secured loan’ is word used by lenders, not borrowers.
I am talking about borrower’s POV in my previous answer.
When banks asks me to bring my house documents, before a loan is sanctioned, its a visual and practical reminder that i could lose my house.
Where as, trader doesn’t have any such visual reminders that discourages or reminds them that they could lose all money. (given the fact that 90% of them lose money)
I would be very careful about trading, if i am asked to front full contract cost.
“…But in my opinion everybody should have the freedom to do what they want…”
I agree to some extent, certain levels of freedom is required for society to evolve.
But, history told us that, certain level of nanny state is kind of good in a away.
As of today, we let govt
- ban drugs
- ban certain content from arts
- ban on buying alcohol certain times of the day
- how to look after children
- save some money aside for retirement
Why let govt tell us what to do with such personal matters and not let personal freedom prevail?
we do so because, not everyone is judicious with their choices in life and not become burden to society later on.
Same goes with trading.
are you saying there is no difference between
=> loan for house/higher education
to
=> loan to go play rummy
Anyone who is paying taxes ultimately adding value to the society.
I agree in theory, but not in practice.
The underlying activity should not do more damage than the tax revenue it generates.
Should we legalize the drugs for tax revenue? No.
Because drugs do more damage than the tax revenue generated.
F&O does lot more damage than the tax revenue it generates.
I already addressed this.
Just because ITD classifies F&O trading as business, does not make it valuable to society in general.
i already addressed why regular entrepreneurship is more valuable than F&O.
As suggested earlier by other users as well this is a service. Besides enables other business around it like broking, education, software development etc. Also for some people provide entertainment as well. If something was not valuable to the society in one or more ways it will typically cease to exist rather than thrive like the stock market.
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Derivative traders subsidize costs for all stock market participants. Without F&O traders no broker would be able to offer 0 brokerage to a much wider array of people (swing traders and investors). Ofcourse. we also pay taxes (whether we make money or not), it adds value.
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The world’s biggest corporates including major car makers, airlines, the biggest tech firms, energy companies, pharmaceuticals etc deal with options to hedge their foreign exchange exposure from businesses and revenues around the world
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Options are used for hedging and risk transfer. Kind of like insurance for unfavorable market movements. Traders provide liquidity and price competition which helps to keep prices balanced and bid/ask spreads tight.
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Options traders create what are called “options-implied prices” of assets over time. Stated differently, we can actually calculate the likelihood of a particular asset having a particular price at all points in time that there are options being traded for that asset. In this way, traders assume all the risk, and just by observing their purchases/sales we are able to make forecasts about future prices.
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People can construct a current portfolio consisting of stocks and options which reduces the risk of that portfolio’s future value. Basically, if you buy a stock and its options, there is, on paper - a way to reduce the risk of holding that stock.
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Like films, it is entertainment for many people. I am not a fan of this but it’s there. It also fuels an entire line of print and media industry (entertainment & jobs).
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Trading does “add value to the society”. Traders provide liquidity in the market, reduce impact cost, and allow normal people to buy & sell stock easily.
If traders didn’t exist, stock market would be illiquid like real-estate (not exactly, but to a certain level).
If a doctor wants to invest his hard earned money and buy a stock, the doctor can easily just press buy button at market order and get a fair price. Otherwise, someone would probably sell him a stock at 1-5% less value, and small part of his money is just gone.
F&O traders also add value. They sell insurance to people. If I need at least X amount of money for education, but I also want to invest. I can buy PE option to hedge, and make sure, I don’t lose education money.
I do agree, If someone’s motivation is just to make money in market, not make it efficient, he/she is not trying to add value directly. But if he/she is profitable, then he/she is adding value by making markets efficient, and If someone is unprofitable then he/she is getting punished for making markets inefficient.
I could be wrong, but at least that’s what I think to make myself feel good about my work. Let me know, If I am wrong.
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It really is bussiness if you look at it closely. F&O is more like insurance bussiness where risks of the underlying stock/scrip is taken or given to other people. When you buy car insurance you are essentially transferring risks to insurance company by paying a fee (called premium). It’s the same thing here.
Even before F &O , there used to be something called forwards market kinda like say I am a farmer and I am growing tomatoes with expectations of selling them at 10rs per kg but I have a fear that tomato price may crash during harvest season , I go and create a contract with supplier that at present value I have sold him tomatoes at 10rs per kg. During harvest the goods would be delivered (settled) . When harvest season comes the tomatoes are delivered.
If market price is 8 per kg then supplier makes a loss of 2rs per kg. If market price is 15rs per kg then I lose 5rs per kg. The forwards market has evolved into futures market. It’s same for options. F&O is basically a insurance bussiness for underlying stock/scrip.
If you think leverage is wrong here, then you have no idea how crazy are insurance companies are leveraged or even banks are leveraged.
See F &O is a type of entrepreneurship where the product is selling or buying stock/scrip insurance (that’s what I call it). Frankly it’s the most low cost time efficient easy to get in bussiness out there.
Regular entrepreneurship costs lot of money, man power and time.
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This is quite a out of box answer, i was not expecting 
Yes, it does enable quite a bit of eco system of participants like brokers, software developers, accountants, CAs, tax revenue for govt.
Let me take a small deviation to a completely unrelated line of thought, before i can answer your question.
One of my friend argued very similarly, when i said my home state should ban alcohol. He said, alcohol should not be banned, because alcohol sales generates a lot of tax revenue, helps build roads, schools, child welfare programs and funds food distribution programs for the needy. I would have agreed with him if people drinked in moderation without affecting their long term health. which is not true.
People who drink alcohol rarely drink in moderation, alcohol is addictive, ruins financial lives, alcoholics often resort to theft/selling family valuables or spend upto 50% of their dialy wages on drinking, thus ignoring the long term wellbeing of their families. My maid’s husband died because of liver failure from excessive drinking, same is true with 10 other families from her slum. their children had to skip school to feed their siblings and could never break cycle of poverty. I still did not call for complete ban because, its impossible to ban alcohol, because anyone can manufacture it.
So, there is short term gain from selling alcohol, but long term loss to the society because core revenue contributor and their families are in ruin.
In the same spirit, i am ok with retail participating in trading, only if blowing up their a/c doesn’t cause financial ruin to their families. how much ever the ecosystem benefits from trader participating, its not worth the financial ruin of core participant, the trader.
“If something was not valuable to the society in one or more ways it will typically cease to exist”
I sort of semi agree with this statement, since it aligns with my capitalist values.
if some activity doesn’t contribute to the society, it should cease to exist.
But trading is not one of them. Drugs, Porn & Prostitution can thrive if allowed, but we still don’t allow it because it has lot of negative side effects on the core participant and service provider. so capitalist values does not apply here.
Thanks for replying. I believe you are actually agreeing with me here
No trader comes to market hoping that he will subsidize existing of zero cost brokers. the benefits you highlight are happy side effects on the ecosystem. if these benefits can be achieved without financial ruin of 90% of participants, i am all for it.
Agree, major corporates, importers & exporters use F&O to hedge and reduce their risks. I am all for it.
Even individual investors use F&O to hedge their portfolios, I myself used F&O to generate passive revenue using covered calls on my massive portfolio. I also use CSP & wheel strategy to enter new positions and exit with profits by using a covered call. Infact, this is why F&O market came into existence.
All the above can be done without margin, i can sell covered call because my underlying is my collateral. When I sell put (as part of CSP), i am ready to take delivery and have cash in my a/c.
But, I am totally against margin for retailers, because it abstracts the risk the trader is taking on. and I bet all the traders who are losing money are on margin.
Infact, i want to go one step ahead and propose if retailers want to hedge their risk to their portfolio, go for it, but if the trader is asking for margin for trading, the risk/insurance/hedging argument goes out of the window.
If someone wants to trade for entertainment, go for it, but prove that it won’t cause financial ruin to you and your family.
Infact, i want SEBI to introduce smaller lot sizes, so that people can actually use options to hedge their portfolios.
I have 1lac position in reliance, but i can’t use options because the lot size is 5-6lac. if sebi introduces smaller lots, i can participate in F&O happily.
You speak like an intelligent person sometimes
and sometimes like a fool.
It could be because of either or all of these reasons
- You have a fundamental misunderstanding of capital markets, its purpose and function.
- You enjoy being a cynic.
- You are a plain fool.
- Sour grapes.
There maybe influences from (1) and (2) - but I suspect there is a heavy influence of (4)
This is my final assessment All the best!
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Thanks for sharing your thoughts.
As you stated clearly, F&O traders don’t come to market with the thought of adding liquidity, they want to earn money.
You are true in saying that, traders sell insurance, i agree. But they are selling insurance without knowing the risk they are taking on.
Even IRDA won’t let anyone become insurer in India without checking finances, depositing collateral funds with IRDA and audits procedures that sell insurance policies. Do you know that if someone wants to become a insurer in india, they need to buy re-insurance from GIC, so that one natural calamity won’t bankrupt entire insurance ecosystem?
Why should SEBI allow these insurance providers (traders) do the same without proving that traders are infact financially capable of providing insurance, prove ahead of time that their insurance selling strategies work.