The ‘gamification’ of Indian equities poses macro and market threats
₹16 trillion in their investments in mutual funds and ₹20 trillion from direct equity investments. The combined value of their investments in mutual funds and equity is now placed at over ₹67 trillion. Another equally remarkable transformation has been the emergence and now dominance of derivatives trading.
The equity derivatives market in India is about 400 times bigger than the underlying cash-market in terms of traded volumes, by far the largest multiple globally. In most markets, derivative volumes accounts for 5-15 times their cash-market volumes. Derivatives in India account for a staggering 99.8% of market volumes, trading a notional turnover of over $5.9 trillion per day.
This ‘gamification’ of the derivatives market has led to a 20-times jump in trading volumes from pre-covid levels, led by a proliferation of short tenure options, and increased ease of onboarding as well as an easy-to-use interface offered by trading apps. The number of active derivatives traders has increased 8 times to about 4 million from less than half a million in 2019. In comparison, in the cash market, the number has grown 3 times—from about 3 million in 2019 to 11 million.
The availability of shorter-duration options (expiry day options are now 64% of total volumes) has led to ‘sachetization’ of the derivatives market, with the average ticket size of contracts now down to ₹1,500, compared to ₹3,600 in 2020. This trend is visible in the US as well, with zero-day-to-expiry options (contracts that expire on the same day as they are traded) constituting 55% of S&P 500 volumes in August 2023. High embedded leverage in shorter tenor deals (up to 500 times) and the lure of lottery-like returns are attracting a growing number of traders to
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