A recent study by the Securities and Exchange Board of India (SEBI) on individual participation in the futures and options (F&O) sector aims to understand the underlying issues and pave the way for more balanced and informed participation. revealed several important points that deserve further attention. The study also found that many retail investors do not actively use F&O products for hedging purposes, exposing them to greater market risk. It is equally good that SEBI acted on Tuesday against excessive speculation in this area.
The report revealed that between FY22 and FY24, an astonishing 93% of individual traders suffered losses on equity F&O trading, with cumulative losses of over Rs 1,800 crore. In FY24 alone, the net loss amounted to Rs 75,000 crore.
Despite these losses, a worrying 76.3% of traders continued to trade F&O, suggesting that risk-seeking behavior and speculative trading are difficult to curb. The report also highlights the concentration of traders and losses in several states.
More than half of F&O traders in FY24 were from just four states – Maharashtra, Gujarat, Uttar Pradesh and Rajasthan. Particularly in Gujarat, traders suffered a total loss of Rs 8,888 crore in FY24. Another notable trend is the increasing participation of young traders. The percentage of traders under the age of 30 increased significantly from 31% in FY2013 to 43% in FY2014, highlighting the need for targeted investor education.
Finally, this report contrasts the losses of individual traders with the profits generated by proprietary traders and FPIs using algo trading strategies. This disparity raises concerns about market structure and the potential impact of algorithmic trading on retail investors.
focus on empowerment
The basis of responsible participation in F&O is comprehensive investor education.
SEBI, National Stock Exchange, Bombay Stock Exchange and other institutions, in addition to existing educational initiatives, will develop and disseminate educational materials explaining the importance of F&O instruments, risk management strategies, and long-term investment objectives. We need to cooperate for this purpose.
F&O products offer great potential for hedging and portfolio management, but their inherent complexity can be difficult for retail investors.
Brokers and intermediaries play an important role in guiding retail investors to responsible trading practices.
Putting in place a robust risk management framework, such as position limits and margin requirements directed by SEBI on Tuesday, could help reduce risks and protect investors from excessive losses. Encouraging investors to adopt a disciplined approach, set realistic expectations and avoid impulsive trading can lead to better results.
By developing a user-friendly platform that provides real-time market data, risk analysis, and educational resources, we empower retail investors to make more informed decisions.
SEBI’s research highlights the challenges faced by retail investors in this complex market.
By prioritizing investor education, simplifying product design, implementing robust risk management frameworks, and leveraging technology, we can create a more vibrant F&O ecosystem that benefits all participants. .
When used responsibly and with a long-term perspective, F&O products offer great potential for hedging, portfolio management and wealth creation.
Mr. Saravanan is a professor of finance and accounting at IIM Tiruchirappalli, and Mr. Williams is the India head of Cellnova Financial.
