Budget moves to tame frenzied trading in derivatives

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Also read | Why Sebi and RBI want retail investors to stay away from derivatives For options traders, the securities transaction tax will increase by about 60%, said Roop Bhootra, chief executive officer of investment services at Anand Rathi Shares and Stock Brokers. “This move would definitely have a negative impact on professional traders who are trading more on intraday basis and generating exceptionally high-volume trades as it will increase their trading costs," he said. The securities transaction tax was introduced in 2004 to rein in speculative trading and rake in revenue from the financial markets.

Investors and traders must pay STT regardless of whether they make a profit or a loss. Average daily turnover in equity futures on the National Stock Exchange increased by 1.5 times between 2018-19 and 2023-24, and in options by 18 times, said Krishna Rao, managing director and co-head, equity broking, at JM Financial Services Ltd. Data on NSE, the world’s largest equity derivatives marketplace, show that the notional turnover of equity derivatives jumped to ₹79,928 trillion in 2023-24 from ₹3,445 trillion in FY20.

“The increase in STT on derivatives was on expected lines and a right step so as to limit the F&O transactions by the high-frequency traders," Rao said. Also read | Retail investors and the draw of options trading, and why regulators are worried High-frequency traders usually work with thin profit margins and at very low cost. The higher STT is expected to adversely affect such traders, forcing them to slash volumes in the near term.