India's markets regulator on Tuesday proposed a series of measures to curb a trading frenzy in options, including raising the minimum trading amount by over three times, reducing the number of contracts expiring each week and hiking trading margins.
The steps, which follow an increase in tax on derivative transactions last week, are intended to curb the participation of retail investors in the options market and will have a significant impact on volumes, traders said.
Authorities have been flagging risks from speculative trading by retail investors, who have been funnelling savings into India's booming options market.
The monthly notional value of derivatives traded hit a global high of 9,504 trillion rupees in May, data showed. The share of retail investors in derivative trading volumes has risen to 41% so far in 2024 from 2% in 2018.
Until last year, the regulator was approaching the growing interest in options trading as an issue related to investor protection, but it has now became a macro issue, Madhabi Puri Buch, chairperson, Securities and Exchange Board of India (SEBI) said.
Large positions in index options and "hyperactive and abnormal trading" activity close to day of expiry have implications for market stability, the markets regulator said.
SEBI has proposed to raise the minimum trading size of new options to 1.5 million rupees to 2 million rupees ($18,000-$24,000) from 500,000 rupees. It seeks to raise the size to 3 million rupees after six months.
It has proposed that exchanges offer options only on a single benchmark index each week. India's two leading exchanges currently offer multiple option contracts each week, which means that an options contract is expiring nearly every day.
The markets regulator has also proposed a hike in margins on near-term expiries and asked brokerages to collect premiums up front.
The regulator has invited feedback on the proposals by Aug. 20 before issuing final rules.
The "massive" changes will bring down retail volumes on options, hit many high frequency and algo traders as well as exchanges, Amit Kumar Gupta, founder of Fintrekk Capital, said.
The proposed rise in contract size is the only practical solution to prevent retail investors from trading options, Rajesh Baheti, managing director at trading firm Crosseas Capital Services said.
"SEBI should begin with only the lot size change which will curb retail entry. The securities transaction tax rise will also affect volumes. Other changes can be kept in abeyance and SEBI should implement changes one variable at a time," Baheti said.
