MUMBAI, Nov 13 (Reuters) – A sudden explosive growth in trading in stock options in India this year has the country’s retailers excited and regulators worried about the risks such speculative fervor could engender.
The boom in derivatives trading in the country’s historically conservative markets, where some products such as stock futures are still too expensive, has come after exchanges changed some options contracts to facilitate faster and cheaper bets and as online retail trading platforms grew.
Data from exchanges, which are big winners from this surge in demand, show the daily average value of assets underlying these stock options more than doubled between March and October to $4.2 trillion. The ratio of the nominal value of derivatives to trading cash is the highest in the world.
India’s stock market regulator Securities and Exchange Board of India (SEBI) has so far not intervened to limit trading, but has issued warnings and said it is aware of the risks.
Market analysts are worried.
The increase in options activity is more speculative than for hedging purposes, said Mihir Vora, chief investment officer at Trust Mutual Fund. “This could magnify any sharp drop in the market and act as a potential risk,” he said.
SEBI and top Indian exchanges, National Stock Exchange of India Ltd (NSE) and BSE Ltd (BSEL.NS), did not respond to emails from Reuters.
But Ashish Chauhan, the head of the NSE, said in a message to investors: “Derivatives trading by retail investors should be avoided due to the high risk involved. Be a long-term player.”
Analysts point to historical examples of novice retail investors being hurt by derivatives trading, particularly in South Korea in the early 2000s, when regulators had to enforce barriers to retail participation.
Moreover, India’s more burgeoning derivatives markets lack railings. Regulators have so far mandated no minimum value or investor qualifications for these stock options trades, and stock markets almost always rise every year—both recipes for higher risk appetite and complacency.
Dozens of digital trading platforms such as Zerodha, Groww and AngelOne (ANGO.NS) have become top brokerages in the past few years as a fintech boom and the stay-at-home environment from the pandemic drive small investors seeking a quick return to robo-trading and other low-cost platforms.
Axis Mutual Fund estimates that there are 4 million active derivatives traders in the country. The traders are mostly small players, according to SEBI data.
Axis said in a report that there is as much as 500 times leverage on some options, meaning a bet of 2,000 Indian rupees ($24.01) gives the option holder exposure worth 1 million rupees, and often retail investors held these bets for just 30 minutes on average.
The total number of derivatives contracts traded on the national exchange – which accounts for the bulk of the options turnover – was 39.85 billion between April and September, almost close to the 41.76 billion traded in the fiscal year , which ended in March 2023.
Fully 99% of these are options contracts, which allow holders to bet on a stock or index rising or falling by paying a fraction of the shares’ value.
The “strong” rise in day-to-day options trading raises questions about investor protection, said Ajay Tyagi, former SEBI chief. “There is froth in the market and retail investors are looking to make easy money with limited understanding.”
Kailash Plaza, a building in Mumbai’s eastern suburbs, has become one of the focal points of the boom, with hundreds of stock traders, brokers and investment advisers crammed into offices spread across five shops.
Bhavesh Shah sits in a small cubicle behind a transparent door in the square. A notice on his door promises that for 500 Indian rupees ($6.00) a month one can earn up to 150,000 Indian rupees.
Shah says his youngest client is 21 years old and invests small sums earned from small jobs. “These young people play a lot of games; they also think of this as a game,” he said.
SEBI WARNING AND WATCH
SEBI will soon mandate that all major brokerage firms issue specific warnings about market risks, said two sources familiar with the regulator’s thinking. SEBI is also urging the stock exchanges to review the incentives offered to high volume traders, they said.
There have also been preliminary discussions about an increase in taxes that could reduce speculative activity, said a third source familiar with the discussions.
However, decisions on taxes are made by the government, and the regulator can at best recommend such a change.
The sources declined to be named as they were not authorized to speak to the media.
Zerodha, one of India’s largest discount trading platforms, says more than 65% of its users are first-time investors and over 60% of new accounts come from small towns. The average age of users who joined in the last year is 29.
The platform has seen an increase in futures and options trading activity, Zerodha said in response to Reuters queries.
People walking around the financial markets in India’s busy small towns are usually less knowledgeable than in trading centers like Mumbai or Ahmedabad.
Despite the risks, many young investors remain fired up.
Siddharth Joshi, a 36-year-old from Surat in western India, said he lost 200,000 rupees trading options on Adani Enterprises ( ADEL.NS ) shares in January. But he is not giving up, he told Reuters by telephone.
“In options trading, I know my loss is limited, but there is an opportunity for maximum profit,” he said. ($1 = 83.2575 Indian Rupees)
Reporting by Ira Dugal and Jayshree P. Upadhyay Editing by Vidya Ranganathan and Raju Gopalakrishnan
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