Why regulatory restraints are not enough to contain retail trading in F&O

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₹96.8 trillion, representing 35% of the market share. However, retail involvement in index futures dropped. This trend is also evident in stock options compared to stock futures.

Individual investor activity in stock options surged 40.6% year-over-year to ₹8.2 lakh crore premium turnover, representing a 29.7% share. (Source: NSE Market Pulse.) This surge in retail participation is not unique to Indian derivatives markets. Globally, exchange leaders like Nasdaq chair and chief executive officer (CEO) Adena Friedman and Terry Duffy, chair and CEO of the CME Group, report heightened participation of individual investors in derivative markets who prefer to deal in more minor contracts and shorter durations.

This trend of retail investors driving derivative volumes is also seen in large US exchanges dominated by institutional investors and hedgers. In India, the critical factor contributing to the attractiveness of options is “the embedded leverage that allows traders to take large exposures with minimum upfront cash" (Reserve Bank of India’s Financial Stability Report, December 2023), resulting in the bulk of intraday cash players moving to index option products. The other factors contributing to this increase may be the democratization of market access and low-cost access to analytics, tools and information for retail investors and brokers.

Constructive use of technological advancements supported by artificial intelligence has helped, to some extent, level the playing field for retail investors. From a regulatory perspective, this unprecedented surge in retail participation is welcome, but at the same time it is a cause for concern. The concerns relate to whether a derivative as a product is suitable for retail investors,