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 )
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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.
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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.
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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.
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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.
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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.