Curbing speculation, India to tighten equity derivatives trading: India's native payment channel

"The era of trading firms making billions of dollars in profits may be over," the head of the trading unit at Indian financial services firm Equirus Securities said on 30 July, in news reported by Bloomberg. In response to overheated trading activity, the Securities and Exchange Board of India (SEBI) released a draft policy proposal on the same day aimed at strengthening derivatives trading rules.

Recent data shows that the Indian stock market continues to hit new highs, with the SENSEX index crossing 80,000 points for the first time last month. This stock market boom has subsequently fuelled trading in stock options and other financial derivatives. At the beginning of February this year, the notional value of Indian derivatives contracts reached $6 trillion, even more than the country's gross domestic product. Indian officials have warned that this retail investor-driven behaviour is a manifestation of the "human propensity to gamble", and that this mania could hinder the transfer of household savings to productive uses. 90% of retail investors have suffered losses in derivatives trading, according to a survey conducted by SEBI last year.

Quoting SEBI Chairman Madhabi Puri Buch's recent remarks, Fortune India reported on 31 July that when Indian households suffered losses totalling Rs 600 billion (about Rs 51.9 billion) in the stock futures market in a single year, which could have been invested more efficiently in other financial products, this had a significant macroeconomic impact.

In a bid to curb speculative trading in equity futures and options, SEBI on 30 July introduced stringent regulatory measures, including raising the minimum size of equity futures contracts, charging options fees in advance, simplifying the number of contracts per week and increasing the margin requirement before delivery of contracts. Just a week ago, the Indian government also announced that it would double the tax rate on stock options trading from 1 October.

It is worth noting that the busy Indian stock market, particularly the financial derivatives market, has attracted a number of international quant funds, including Citadel Securities and Old Mutual, according to Bloomberg.Jane Street Capital claimed in April this year to have realised $1bn in profits from its quantitative strategies in the Indian market. This not only demonstrates the huge profit potential of institutional quant operations in the previous Indian market environment, but also highlights the significant disadvantage of retail traders in the market.

Bloomberg reports that restrictions imposed by India could reduce liquidity in the $4 trillion futures and options market and cut profits for market makers and traders. In a research report released on 30 July, US investment banking group Jefferies said the new rules will directly impact about $351 TP3T in stock options trading fees, and retail investors may also pull out due to the new rules, which will undoubtedly affect the stock brokerage business.

Narindra, Managing Director of SKI Capital, an Indian investment firm, commented, "The game between institutional high-frequency trading and retail investors is like a game of 'cat and mouse', where the institutions are the cats and the retail investors are the mice. When regulators tighten their grip on derivatives trading, retail investors will pull out, the market will become less liquid and how can the cat play without the mouse?"