Sebi flags expiry-day derivatives surge as retail losses top ₹1 trillion

Mint

3 days ago

Mumbai: A senior official at India's markets regulator has raised red flags over the surge in short-term equity derivatives trading, particularly expiry-day index options, warning that the current structure may be unsustainable and detrimental to long-term capital formation.
The Securities and Exchange Board of India (Sebi) has been closely tracking the exponential rise in such activity, which has been accompanied by significant losses for retail investors. At the 11th Capital Markets Conclave of Confederation of Indian Industry (CII) in Kolkata on Thursday, Sebi's whole-time member Ananth Narayan G said the regulator is focused on balancing innovation with investor protection.
'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,' Narayan told the gathering.
He flagged a stark imbalance in market activity: '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.'
Narayan cited Sebi's latest research report, released on 7 July, which found that 91% of individual traders incurred net losses trading in futures and options (F&O) in FY25, with total losses exceeding ₹ 1 trillion. 'This is a large sum of money that could have otherwise gone towards responsible investing and capital formation,' he said.
The regulatory focus on expiry-day option trading comes in the wake of Sebi's recent action against US-based quant trading firm Jane Street.
On 3 July, Sebi barred the firm from accessing the securities market for deploying what it described as manipulative trading strategies around index options expiry, directing it to deposit ₹ 4,800 crore—the alleged unlawful gains—into a Sebi escrow account.
Jane Street has since complied with the directive, paving the way for a potential resumption of trading in India, subject to Sebi's review. The regulator is currently assessing the firm's request.
While Narayan did not refer to Jane Street by name, his remarks appeared to echo broader regulatory concerns: 'noise trading that may potentially undermine confidence in price formation' and 'unhealthy' market structures.
Narayan also drew attention to possible conflicts of interest: 'We recognize 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?'
Sebi has introduced a series of regulatory measures since October 2024 aimed at tempering speculative excesses. 'We are seeing some signs of moderation of the trends noted above. However, this specialized area requires ongoing constructive debate and work,' Narayan said.
That October, the regulator reduced the frequency of weekly expiries, increased contract lot sizes, scrapped calendar spread benefits on expiry day, implemented intraday position checks, mandated upfront collection of option premia, and raised extreme loss margins on expiry days.
In May 2025, Sebi followed up with measures to improve risk metrics and disclosures in F&O, reduce instances of spurious F&O ban periods in single stocks, and strengthen oversight of index options to mitigate potential concentration or manipulation risks.
Fresh data from Sebi's 7 July study, based on individual trading activity between December 2024 and May 2025, shows early signs of cooling. In FY25, turnover by individual investors in index options declined 9% year-on-year in premium terms and 29% in notional terms. The number of unique retail participants in the derivatives market also fell 20% from last year's record highs, suggesting a slowdown in the speculative frenzy that had drawn millions of new entrants.
Looking ahead, Narayan called for deeper market engagement: 'We must look for further ways to further deepen our cash equities markets, even as we look to improve the quality of our derivatives market by extending the tenure and maturity of the products and solutions on offer.'