SEBI’s New Rules: A Step Forward or Just Another Hurdle?

Exploring the Impact of Recent Changes on Retail Traders and the Future of F&O Trading

In my last newsletter on Sunday, I explained the need for the reforms that SEBI had proposed a few months back.

Most of the readers participated in the polls I conducted with great enthusiasm.

The poll results are out, and you can check them at this link below:

They were scheduled to meet on Monday to discuss these reforms.

Finally, we have some action from their side. A lot of changes have been proposed.

It will not be possible to cover them all in one letter.

So, today, I am going to discuss the reforms they have made in Futures & Options Trading.

Whether good or bad, let’s first go over the top 6 changes they have made in the derivatives trading segment:

1. Limited Weekly Expiries: SEBI has now allowed only one weekly expiry per exchange to cut down on heavy trading on expiry days.

2. Bigger Contract Size: The minimum contract size is now ₹15 lakh, up from the earlier ₹5-10 lakh, making it tougher for small investors to enter.

3. Extra Margins on Short Options: A 2% extra margin will now be added to short options contracts on the expiry day.

4. Upfront Premium Collection: Brokers must now collect option premiums upfront from buyers to stop risky intraday trading.

5. No Calendar Spread Benefits on Expiry Days: Benefits from calendar spreads on expiry days are now removed to prevent excess trading.

6. Intra-Day Monitoring of Positions: Exchanges will now monitor positions within the day to prevent market manipulation. This rule will start from April 2025.

As per SEBI, their study showed that 1.13 crore retail traders in the F&O market had a total loss of ₹1.81 lakh crore over the last three financial years (FY22-FY24).

The report also found that only 7.2% of these traders made any profit during this time.

The number of retail traders has nearly doubled in two years, going from about 51 lakh in FY22 to around 96 lakh in FY24. Regulators are worried that household savings are being used for risky trading in F&O, which they compare to gambling.

Before I share my thoughts on these changes, I’d love to know what you think. Please take a moment to share your opinion by participating in the poll below.

Here’s My View – What Do You Think?

Lets, go one by one.

1. Limited Weekly expiry.

My question is, why allow even one weekly expiry? It’s like saying, 'Drugs are harmful to your physical and mental health, so don’t use them daily; just once a week is fine.'

Futures and Options are meant for risk management, but I don’t see a strong reason for having weekly contracts in India. The data clearly shows that very few are using weekly contracts for actual risk management or hedging. And honestly, if someone wants to hedge their position, why can’t they use monthly contracts instead?

Another thing – why are exchanges allowed to choose which instrument gets a weekly expiry? Chances are, NSE will go for Bank Nifty over Nifty. I’ll dive deeper into this whole weekly expiry saga in another letter. But my learners know that I’ve been against weekly expiries since I started teaching in 2019, and I’ve always spoken about their harmful effects.

May I have your opinion now please?

2. Bigger contract size.

   We all know that retail traders have mostly been buyers in the F&O market. However, in recent times, with more knowledge and exposure, many retail traders have started to sell options as well. But here’s the catch – with the increase in contract size to ₹15 lakh, retail traders might be pushed back into the position of only being buyers again. This change seems more tailored to benefit sellers, mainly those with deep pockets.

   Now, let’s think about this: with a larger contract size, fewer retail traders will be able to afford to sell options. Selling requires more capital, and a higher contract size means they’ll need even more funds to take on that role. Most retail participants don't have such large sums lying around. So, this move will likely narrow down the pool of sellers to big players. But what about the buyers? If there are fewer retail sellers in the market, does it mean the volume of buyers will also shrink because they won’t find enough sellers willing to trade?

   So, is this really a move towards safeguarding retail traders, or is it more about creating a market environment that favors big institutions?

Let’s hear your thoughts.

The last four points mainly revolve around the increased margin requirements. My view on this remains the same – I don’t think these measures will solve the problem. Speculation won’t stop because of higher margins. For those trying to trade with smaller capital, these changes will make it even more challenging. It's hard to say if this will truly bring about the intended positive impact.

Awareness and Open Discussion: My Final Verdict

Let's talk about the importance of awareness and having an open discussion around these changes. My final verdict is this: while these measures by SEBI will not entirely solve the problem of speculation and gambling, they do present a positive step for those who wish to approach trading as a serious business.

Here’s why:

These changes, like the higher margin requirements and upfront premium collection, make it tougher for people to enter the market. While this might not stop all speculators, it does push for a change in mindset. It makes retail traders think more carefully and might encourage them to approach trading as a serious business, with proper capital and risk management, rather than just taking quick chances. Over time, this could help create a more responsible trading environment.

However, this doesn’t change the fact that retail traders with smaller capital might find it harder to participate. The key here is awareness – knowing the real nature of trading, the risks involved, and how to handle these changes effectively.

For an open discussion on this topic, I invite all my learners to join me for a Zoom session this coming weekend. If you want to be a part of this conversation, please WhatsApp me directly on (+91 99108 94406), and I will share the time and link to join. Let's discuss how we can adapt to these changes and make informed trading decisions.

As we reflect on SEBI’s new reforms and the changing landscape of futures and options trading, it's important to remember that every decision we make now shapes the future of trading.

Just as Gandhiji said, "The future depends on what we do in the present."

Regards, Kundan Kishore

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