Sebi’s right about the derivatives boom: The market’s tail mustn’t wag the dog

livemint.com:

₹5 lakh to ₹15-20 lakh, higher upfront margins to be paid for trades, allowing only one weekly expiry per exchange (as opposed to daily), and the intraday monitoring of position limits. These and other steps would be in addition to the action it took earlier. On its part, the Centre’s budget has doubled the securities transaction tax on futures and options.

The broader message is clear. Authorities are going all out to tighten screws on speculative trading, which is seen as having gone out of hand. Also read: SEBI’s proposed F&O measures: How will brokerages like Zerodha, Angel One, ICICI Securities be impacted? “The tail had grown bigger than the dog," Sebi chairperson Madhabi Puri Buch told Mint, referring to an exponential rise in derivatives trading.

“Yes, it does look, as someone said, that the tail is wagging the dog, because, ultimately, [the use of futures and options] was meant to be a way of risk management, hedging, etc," she added. The data has been dropping jaws. Index options volumes on NSE surged almost 13-fold from ₹10.8 trillion in 2019-20 to ₹138 trillion in 2023-24.

Meanwhile, cash market turnover during the same period rose a modest 2.25 times from ₹89 trillion to ₹201 trillion. Though cash-segment trading is still considerably higher, the gap is closing fast. On current trends, it may not be long before derivative trades match their underlying segment of assets, which would be a conceptual anomaly.