SEBI curbed India's options frenzy. What changed?

KOCHI: Retail participation and losses have fallen sharply after SEBI's derivatives crackdown. But India's derivatives market remains enormous — raising the question of whether risk has actually fallen or merely changed form.

For years, India's derivatives market was driven by a spectacular surge in retail participation, particularly in short-duration index options. SEBI stepped in from late 2024 with larger contract sizes, fewer weekly expiries, upfront premium collection and tighter position-limit monitoring.

The immediate impact has been substantial.

The number of individual investors trading equity derivatives fell nearly 20 per cent to 7.86 million in FY26, while their aggregate losses fell 18 per cent to Rs91,685 crore from Rs1.12 lakh crore a year earlier. Total equity-derivatives turnover declined from Rs213 trillion to Rs202 trillion, according to reuters.

Options contract volumes fell even more sharply, by about 51 per cent.That looks like a clear regulatory success, though it doesn't necessarily mean that India's derivatives market has shrunk by anything like the same magnitude.

Fewer contracts does not mean less risk

A contract count tells us how many contracts changed hands. Notional value tells us the underlying exposure represented by those contracts, while open interest (OI) tells us how many positions remain outstanding.

A trader can generate enormous turnover by repeatedly opening and closing positions without carrying a large outstanding exposure. Conversely, a participant can trade relatively little while maintaining substantial positions.

That is why the real question after SEBI's intervention is not simply whether trading has fallen. The vitalquestion is "Has the amount of risk in India's derivatives market fallen — or has the way that risk is traded changed?"

The retail frenzy curtailed

SEBI's measures were aimed at the extraordinary concentration of retail activity in short-duration index options. Larger contract sizes and fewer weekly expiries made the kind of high-frequency expiry-day speculation that had become popular among retail traders more difficult and expensive.

The results show that behaviour has changed. But derivatives themselves have not disappeared. Index options remain overwhelmingly the dominant component of India's equity-derivatives market. That distinction matters.

SEBI has not tried to eliminate derivatives. It has tried to make the market less conducive to mass retail speculation while preserving its legitimate functions — hedging, liquidity, price discovery and risk transfer.

Has risk moved elsewhere?

There is already evidence that some leveraged investors are looking beyond derivatives.

A Reuters report in July found that some traders who moved away from options had shifted towards margin trading facilities, or MTF, where investors borrow against shares to take leveraged positions. According to a reuters report, MTF outstanding has risen sharply, with brokers reporting that some traders previously active in derivatives have moved towards this route.

That does not mean SEBI's derivatives measures have failed. It does, however, raise a larger question: When leveraged speculation moves from one product to another, has risk really disappeared?

The recent experience of Jane Street offers a reminder of why that question matters. One of the world's most sophisticated market-making and trading firms reportedly suffered a roughly $15 billion trading hit in July despite its sophisticated hedging strategies.

The lesson is not that retail traders and Jane Street face comparable risks. It is that sophistication does not eliminate market risk.

The next test for SEBI

There is little doubt that SEBI has succeeded in reducing the intensity of India's retail options frenzy.

Retail traders are down nearly 20 per cent. Their losses are down 18 per cent. Options contract volumes have fallen sharply.

But that is only the first test.

The bigger test is whether the market that remains is becoming less speculative and more useful for genuine risk management — or whether speculative risk is simply migrating into other products and other parts of the financial system.

SEBI may have taken the heat out of India's options boom. The more difficult question is what happens to the risk after the heat is gone.

(The article has been written after discussing with derivatives trading experts in Mumbai and Kochi)