I was reading this SEBI discussion paper put out on July 12th 2017. It seems like SEBI wants the number of retail traders participating in F&O markets to reduce. They also ask for comments at the end of it, what would yours be?
SEBI off late is doing great things to clean up the system, the enhanced supervision rule, the margin trading funding circular, trying to make onboarding easier, and more. I am not sure about this discussion paper though and if making it tougher for retail to trade F&O would be the right thing. Below is my reasoning. (ps: I run a brokerage firm, so I have a vested interest when writing this 
)
-
If we forcibly get the smaller traders out of F&O, will they actually stop? I’d guess no. There are so many CFD & Binary option platforms (you can start using credit cards), Dabba operators(using cash) - they might just move onto these platforms. All of them unregulated and exponentially more riskier than brokers that SEBI regulates.
-
Without F&O, maybe the first thing a small trader will do is trade equity intraday. Intraday equity is probably more speculative than trading F&O as positions have to be closed by end of day.
-
If small traders don’t have access,they will probably start pooling money with people who have - to get access. Again increasing the risk and opening up another bag of worms.
-
It looks like SEBI wants to promote SLB (Stock lending and borrowing). SLB is not working today, not because there is F&O trading. The rules around SLB is complex, so there is a lot of resistance to participate. Reducing F&O will not really mean increase in SLB volume.
-
F&O in a way cushions the market when there is news that can make the market fall or increase volatility. Profitable positions covering itself slows down the intensity of the move. If smaller traders move out, the drop in volumes can potentially get other people to slowly move out of F&O as well. This can potentially increase the trading turnover of Indian contracts in other international exchanges by institutions. So there is a risk of a domino affect that can soon reduce all derivative turnover in India and make our markets a lot more volatile.
What can SEBI do
I think the first step in addressing this is to mandate exchanges and brokers to ensure that every broker runs initiatives to educate each of their clients. Not just introducing F&O, but also on taxation around it, STT risk on exercised options, and etc. Also make SLB a lot more easier to be accessed, so that will automatically build on its own. Maybe make it mandatory for all brokers to offer demo trading platforms where people who have never traded have to complete a few days of paper trading derivatives before actually getting started with real money. These are all I can think of for now.
18 Likes
SEBI also need to remove stocks from FnO which don’t have sufficient liquidity in Options.
In India 2 regulative institutions, exactly doing opposite of each other, one is RBI ( even the judiciary respect RBI) which is concerned about customers , at the same time SEBI which is against the retail customers, SEBI is more concerned about FIIs then retail investors , the financiers of the market . SEBI first killed Nifty mini contracts to avoid retails, now they are on F&O ( F&O contracts are made in such a way that , most of the stock prices are in 4 digit ) F&o was the only window for retails to make money, during Market down trend . by closing this, at the end only FIIs and mutual funds will remain in Indian market.
3 Likes
By when do you think SEBI will announce a decision on this matter?
By the way, increasing the lot size in F&Os for all stocks to reduce the participation of retail traders does sound quite unreasonable and wrong. If it’s only for high volatility and less liquid stocks then it’s still somewhat meaningful.
1 Like
I have not read the SEBI paper. I came here to ask another question but caught this thread and thought it more important to reply.
I am trader and have been trading since last 5 years. Rather, I started 5 years ago and kind of started trading only since 2-3 years or so.
I have faced many odds right from learning to choose right stocks, when to sell and when to buy, several other different technical problems that a day trader faces, like order mismatch etc.
All of this led me to FnO, which is quite fascinating as it not only gives good leverage, but allows to hold a position for a fraction of the amount that normal delivery would cost.
For me it is the holy grail of day trading. If one is good at technical analysis (won more than 80% of trades), then FnO is the thing to go for.
Also, when I started there were one or two scrips that could be traded for below Rs. 10000 and that was a huge draw for me. But soon things changed and I couldn’t trade because of high margin requirement, change of lot size.
Low margin requirement enables high market participation, leading to liquidity of scrip in question. If there are less people scrips will be more illiquid and less tradeable and higher chances of getting stuck. Which would mean further loss of market participation.
Not only that, by increasing margins and making it more difficult, SEBI will only be hurting the small retailer more as many of them will lose their chance to take part in this market.
Also, those who can afford and still want to trade in FnO, they will still take part and will be at a greater risk of losing money.
SEBI cannot control kids into going into the mango orchard by building bigger stronger walls. Someone will find a way to make a hole in it or way to climb it. And when that happens, it will be disaster.
Rather, SEBI should take efforts in educating the traders about the dangers of trading in FnO and how to avoid it (for the most part).
I think SEBI doesn’t want people to trade in FnO so making this excuse. Perhaps it wants people to take deliveries and sit on profit or loss for ages as most people do, traditionally.
It’s like saying, we will build more speed bumps on expressways to reduce accidents. But that is highly impractical. If you don’t want accidents due to speed then why build the expressway in first place. It’s highly ridiculous and I would highly oppose such a move.
6 Likes
Zerodha on our side, sounds good. If this happens, it really will kill it over time. Like a slow poison.
If Zerodha gives margin funding @ 10% interest I don’t have to trade in FnO.
This new bomb from the foolish sebi.
Is it even feasible?
Or just meaningless speculation?
@nithin This is stupidity, today’s young retail investors are much smarter than they were, if there is no liquidity and market participation then they is no room for learning and growth. Even if this rule comes out then there will be massive outrage in the trader community forcing sebi to reconsider. Almost all the retail f&o traders are furious with such a proposal by the sebi including most brokers. The sebi currently is seeing a lot of criticsim for its decision also by news outlets. Alienating retail investors is also increasing the parity between retail investors and institutional investors, which is also what the the so called regulator sebi stands for. And all the “levelling the playing field” bs. Where did it go? This is somewhat like a ponzi scheme by the regulator to collect for stt that’s it…
1 Like
Chill out. Let see what happens. The proposal may even get struck down and never take off.
In the meantime, file your ITR, if you already haven’t done so.
Lets see how it plays out. I hope/pray this doesn’t ever materialise. and such proposals just never even get conceptualised.
And relax 
really hope so man beacause this is really frustrating, any information that we get on the topic lets share it on the platform so that all of us are aware of this and can do something if possible. Cheers
The real issue is to have a professional heading SEBI
Like RBI is the Government’s banker, but is headed by a professional from the industry.
Never IAS babus sit on RBI.
Same should be with SEBI.
Right now, SEBI is headed by bureaucrats, who may/may not know how the industry works.
They’re generally a generation behind technology.
Anyway, pray and hope that retail traders never face any restrictions in taking derivative exposure.
And have thandai in the meanwhile!
2 Likes
@nithin Please if you have the means to contact sebi and put the retail side and the logical side of the story, then please do. It’ll go a long way for us.
Your points are absolutely correct , these IAS babus here politicians , so if anybody bring notice to retailer traders problems to them will work out , like to head or party president , either of BJP or Congress
1 Like
Agreed
Plz put our view forward.
You’ve met the PM. You got national lvl awards!
You’re influential.
Help out the real retail traders!
Guys,
We are by far the largest retail brokerage in India by retail F&O trading volumes. Hence if something is done that brings down retail F&O volumes, it will hurt us as a business also quite a bit.
I kind of concur with SEBI that there has to be some kind of product suitability framework. Maybe a mandatory online exam to take ( to double check if the person understands risks and F&O as a product). Today a lot of people end up trading without even knowing what they are trading.
This thing around exposure based on income etc, hmm… I don’t think it is even practically possible to bring this in play. Especially more considering none of the farmers in India pay any tax. So would it then mean that farmers can’t trade/hedge using derivatives at all? Also, if same trader is using multiple brokerages and on multiple exchanges, who will monitor what is the overall exposure?
I have made my voice heard in all the right forums. We just have to wait and watch on how it plays out.
7 Likes
- Without f&o , how can possible to hedge or play downside trend in markets?.
SLB is not suitable due to premium or interest and time lag. - Even exam conducted is not right answer.
Because trading is minus-sum game. Even if we ignore brokerage or charges still it is zero sum game.
Morale, markets always have one loser and one winner in any case.Even we learn anything,truth remains same.
If you make f&o difficult for retailer trades just with reason of protecting for major risk…
Then that’s not fair because that they can also do with high volume intraday trading using high margin facilities like bo and co.
- Sebi should reduce down lot size future contract so retail trader can easily manage risk.
( If they say that with less lot size they buy multiple lot then it can also done with cash equity.)
I am really disappointed by sebi. They should try to make retail participation better. They are just trying to make retail out from f&o.
1 Like