Derivatives trade: Sebi is taking a pro-market approach

livemint.com:

₹8,587.5 crore, instead of joining the rally. In contrast, foreign portfolio investors bought Indian shares worth ₹6,617.3 crore that day while mutual-fund purchases stood at ₹3,072.9 crore. Then, on 4 June, when the actual election results were declared and the BJP fell short of a simple majority, retail investors purchased shares worth ₹21,178.9 crore, sensing an opportunity in a market that dropped some 6% in response to that news.

Again, foreign investors and mutual funds went the opposite way, selling shares worth a combined ₹18,760 crore. The rise of stock indices in the following sessions made it clear that retail investors had played it right. But this is a rare instance of household traders emerging on top.

More often, it is retail investors who end up losing, unable to time the market like professionals do and bearing more risk than they can grasp and afford. Our recent boom in the retail trading of equity futures and options (F&O) offers proof of reckless investing. As many as 9 out of 10 retail investors were found to have lost money in 2021-22 by a study done by the Securities and Exchange Board of India (Sebi).

This explains why Sebi now proposes to tighten stock eligibility for F&O trading. In a discussion paper released on Sunday, it broached the idea of raising the bar for its condition of sufficient liquidity and trading interest in stocks for derivatives of these assets to be traded. “Without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection," Sebi said.