Derivatives decline: Where did F&O volumes disappear?

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Subscribe to enjoy similar stories. With trading volumes in futures and options (F&O) shrinking dramatically, a pressing question emerges: where did these volumes go? Some experts speculate the volumes might have shifted to small-cap stocks in the cash market. To protect investors and rein in speculative trading, India’s markets regulator took decisive measures targeting the derivatives segment (F&O), including reducing weekly option products that dominated trading volumes.

This has led to a sharp decline in the total F&O turnover since November. The ripple effects are visible in the cash market as well. After peaking in July, the daily average turnover has been falling, particularly in large-cap and mid-cap segments.

Adding to this narrative, a YES Securities report dated 17 December highlighted a sharp decline in the five-day average NSE total F&O turnover, from ₹413 trillion in January to ₹186 trillion in December. A trend emerging from this data is a likely shift of trading volumes from index derivatives to the small-cap cash market, said Hitesh Jain, lead analyst at YES Securities. “We sense that investors are increasingly focusing on small-cap opportunities, given the broader price resilience in these stocks compared to their large- and mid-cap counterparts over the last three months." While some market participants said this could be a valid hypothesis, others cautioned against drawing a clear link between trading volumes in the derivatives and small-cap markets.

Over the past three months, the Nifty 50 has declined by 8.5% while the Nifty Smallcap 250 has dropped just 5%. The Nifty Midcap 100 has shed 6% in the same period. According to Chandan Taparia, head of derivatives wealth management at Motilal Oswal