KOCHI: As SEBI gears up to rein in retail trading in derivatives, a less discussed consequence is starting to surface – one that could reshape the future of India’s most active market segment – F&O market.
Talking to businessbenchmark.news, F&O experts noted that if protective measures aimed at retail investors go through effectively, the options market could become significantly less attractive to institutional and corporate participants. And with that, India’s record-breaking derivatives volumes may begin to shrink.
Over the past few years, the F&O segment – especially weekly options – has seen an explosion in activity. A large part of F&O growth has come not from institutions, but from retail traders, many of them new to the market and enticed by low capital requirements, high leverage, and the lure of quick profits.
“These traders have become the dominant force in the market, often forming the other side of trades taken by institutions and professional traders,” said a stock broker in Mumbai.
This is where the risk of SEBI’s intervention begins to take shape. In a zero-sum game like derivatives, one trader’s gain is another’s loss. Institutional players typically rely on their ability to manage risk efficiently, hedge positions, and profit from volatility.
Retail traders, soft and easy counterparty
But they also benefit – directly or indirectly – from retail traders taking positions based on emotion, momentum, or misinformation. The retail crowd, often underprepared and overexposed, becomes the soft counterparty that makes many of these strategies viable.
If SEBI succeeds in limiting this participation in its efforts to protect unsuspecting retail traders – either by phasing out weekly expiries, imposing higher entry thresholds, or enforcing risk filters – that easy counterparty disappears.
And along with it, the liquidity, volume, and trading spreads that have made India one of the busiest derivatives markets in the world. “What was meant to protect could also disrupt.”
To be fair, SEBI’s concerns are valid. Internal studies and surveys have shown that most retail traders in the F&O segment lose money. Many do not understand the risks, the mechanics of time decay, or the impact of volatility shifts.
Weekly options, in particular, have become a hotspot for high-risk, short-duration bets – a kind of financial lottery with poor odds. It’s not investment. It’s gambling with leverage.
SEBI now appears to be responding with structural reforms. A consultation paper is expected soon, possibly outlining a glide path away from weekly expiries. Discussions have also begun around rebalancing market participation between derivatives and the cash equity segment — a quieter, slower part of the market where real wealth can be built over time.
‘Focus shifting to cash market?
Unlike derivatives, the cash market does not come with a ticking clock. Investors can buy and hold, allowing conviction to play out over months or years. There is no expiry, no time decay. Yet, this segment is losing attention, even as it remains the most productive part of the market for long-term capital formation.
SEBI’s efforts may be an attempt to restore that balance – to bring traders back from the casino floor to the fundamentals of ownership and investment.
But the transition won’t be easy. The derivatives ecosystem is deeply entrenched, feeding not just traders, but brokers, platforms, and institutions who all benefit from high volumes. Any sharp reduction in activity could have business and market-wide consequences. For SEBI, the challenge is to protect without paralysing, to rebalance without breaking.
The intent is clear: reduce reckless risk-taking, protect unsophisticated participants, and restore focus on long-term investment. But in doing so, SEBI may also be pulling a key thread in the fabric of the current market structure.
And when that thread is retail, the entire derivatives market – institutions included – could feel the slack.
