Brokers push back as Sebi wages war on speculation

Mint

2 days ago

Brokers and market intermediaries are pushing back at tighter supervision looming over the derivatives market, as mounting losses among retail investors drive the regulator to consider fresh measures.
A week after Mint reported that the Securities and Exchange Board of India (Sebi) may overhaul the weekly contract expiry schedule if its recent curbs failed to cool the options fever, a brokers' association met Sebi chairman Tuhin Kanta Pandey as part of a routine meeting.
A broker who attended the Association of National Exchanges Members of India's (ANMI) 15 July meeting said industry representatives implored the regulator not to discontinue weekly expiries. Sebi may move from the current weekly expiry regime to a single expiry every fortnight, severely curtailing trading opportunities, Mint had reported on 9 July.
'Irreparable damage'
'Removal of weekly expiry will cause irreparable damage to market liquidity and risk management," the broker said. ANMI also called for removing the 2% extreme loss margin on expiry day and reinstating calendar spread benefits, arguing these steps would reduce trading costs and align Indian markets with global standards.
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Brokers instead suggested Sebi could consider limiting access to weekly options trading to investors who pass a certification—akin to the US Series 7 licence—demonstrating knowledge and risk awareness. Additionally, Sebi could also impose minimum net worth or trading capital requirements and permit only those contracts with adequate open interest and notional-to-premium ratios.
The regulator has been focusing on the frenzy in derivatives for a while.
'Adverse consequences'
On Thursday, Sebi whole-time member Ananth Narayan G. said at an event, 'On expiry days, comparable turnover in index options is often 350 times or more the turnover in the underlying cash market—an imbalance that is obviously unhealthy, with several potential adverse consequences." He cited Sebi's latest research, which found 91% of individual traders ended FY25 with net losses in futures and options, with aggregate losses exceeding ₹1 trillion.
Narayan emphasized, 'There is no question that derivatives and indeed, speculation are vital for price discovery, hedging, and ensuring market depth. But certain trends in our equity derivatives ecosystem have warranted a closer look for a while now." He also acknowledged the potential concerns of market infrastructure institutions, brokers, and other intermediaries, whose revenues may depend heavily on these short-term derivative volumes. "But we must ask ourselves collectively – is all this at all sustainable?", he wondered.
Sebi's case rests on growing evidence that short-term contracts, particularly weekly options, have caused 'an unhealthy imbalance in market structures."
Will it backfire?
However, brokers warn that shutting the door on weekly expiries could backfire. Kamlesh Shah, managing director at Share India Securities and former ANMI president, argued, 'To ban a product is not the solution. The product is in line with international practices where short-term contracts are favoured the most. Banning weekly products may create unwarranted volatility... We have technology available to protect the market from undesirable practices. In addition to that, to protect interest of retail investors, we may introduce product suitability... We therefore feel that the current guideline for weekly contract may continue."
Shah of ANMI also made the case for reinstating Bank Nifty as a weekly/fortnightly contract: 'Bank Nifty has been by far the best product India market had ever held. By allowing one benchmark contract for weekly options, Bank Nifty contracts were removed from weekly cycle... We believe that this contract is necessary for shorter duration, keeping in view volatility of the market and international events."
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The recent regulatory thrust also follows Sebi's interim order against US-based Jane Street, a major liquidity provider, for alleged manipulation on expiry days. The regulator ordered the seizure of ₹4,800 crore in alleged unlawful gains. While praised for acting against manipulation, the move triggered concerns about new compliance burdens and market uncertainty.
"Given the context of the large trading in index options, the regulator wants to see if its recent measures result in a meaningful dip in volumes over the next few weeks. If there isn't much of an impact, fresh proposals could be considered after a due consultative process," the broker cited earlier said.
'Weekly options necessary'
K. Suresh, current ANMI president, added, 'Weekly option is required for the purpose of hedging—the only thing is that it should be least disruptive to the market... In the absence of speculators, there will be lull in the market. Sebi should bring in some surveillance—to avoid mischiefs like Jane Street... exchanges have good surveillance, they can stop those trades which will prevent losses to investors."
Sebi's policy revamp began in October 2024, with limits on weekly expiries, increased contract lot sizes, higher margins, the withdrawal of calendar spread benefits, and rigorous intraday checks. Further steps in May 2025 targeted position limits, disclosures, and risk metrics.
A Sebi study on trading activity in the equity derivatives segment (EDS) released on July 7 found that while the premium turnover of index options was down 9% during December 2024 to May 2025, it was still up 14% from the same period two years ago. Moreover, while the turnover of individuals in premium terms was down 11% year on year, it was up by 36% from the same period two years ago. Also, while the number of unique individuals trading in EDS was down 20% from a year ago during December-May, it was up 24% from two years ago.
Heavy trading
"India continues to see a relatively very high level of trading in EDS, compared to other markets, particularly in index options," the study found, adding that 91% of individual traders incurred a net loss in FY25, a trend similar to that in the preceding fiscal year.
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Brokers have complained of a liquidity crunch, as F&O turnover plunged and bid-ask spreads widened. 'Trading costs are up, and it's the retail segment that is getting squeezed," a broker said on condition of anonymity. While Sebi's intent is retail protection, some worry that traders are being pushed into riskier monthly contracts or even to unofficial markets and crypto substitutes, where regulatory oversight is absent.
Sebi officials have maintained that moderating speculative excess is a work in progress, not a one-off. Narayan said at the event, 'We must look to improve the quality of our derivatives market by extending the tenure and maturity of the products and solutions on offer. This specialized area requires ongoing constructive debate and work."