Derivative markets enhance price discovery and market liquidity. However, without sufficient depth in the underlying cash market and appropriate position limits around leveraged derivatives, there can be higher risks of market manipulation, increased volatility, and compromised investor protection, SEBI said in a recent consultation paper.
In addition, stocks that have low derivative turnover, low open interest and narrower participation in the derivatives segment are vulnerable to manipulation and expose investors to heightened risk.
New proposals
This is why SEBI, after a major change in 2018, on the framework for selection of stocks for derivatives trading, has proposed to tweak certain norms once again.
SEBI’s recent consultation paper proposes to set higher eligibility norms for a stock’s median quarter sigma order size over the last six months (the order size that is required to cause a change in the stock price equal to one-quarter of a standard deviation) to ₹ 75-100 lakh from the current ₹25 lakh; its market-wide position limit to ₹1,250-1,750 crore from ₹500 crore and average daily delivery value in the cash segment to ₹30-40 crore from ₹10 crore.
At least 15 per cent of the trading members active in all stock derivatives or 200 members, whichever is lower, should have traded in any derivative contract on the stock. The stock should have traded on minimum 75 per cent of trading days with average daily turnover (premium basis) at a minimum ₹150 crore and average daily open interest between ₹500 and ₹1,500 crore.
More measures needed
Though the intent is right, the current steps may not be enough. For instance, according to Nuvama research, about 78 stocks including new-age tech stocks Zomato, Paytm, PB Fintech, Nykaa and Delhivery and others such as Jio Financial Services, Infibeam Avenues, LIC, Olectra Greentech, Adani Green, Adani Total Gas, Tata Elxsi, and Piramal Pharma may enter F&O trading.
On the other hand, the brokerage sees 23 stocks, including Abbott India, Bata India, Berger Paints, City Union Bank, Granules, JK Cements, Sun TV Network and UBL, that may exit. Currently, there are 182 stocks available for F&O trading. So the proposed changes may acutally increase the available pool of stocks in F&O to nearly 230.
Secondly, if the idea is to rein in F&O trading, most of the action in derivatives is centred around index options, especially the Bank Nifty. Stock futures and options are contributing just 0.11 per cent and 0.18 per cent, respectively, on overall contract volumes. Therefore, the index segment requires attention. Weekly options contracts can either be restricted for retail investors or completely eliminated.
SEBI study
According to a SEBI 2019 study, 89 per cent of index option traders lost ₹0.77 lakh on an average while 82 per cent of stock options traders lost ₹0.66 lakh on an average. SEBI can also look at allowing traders with significant losses a cool-off period after which they can resume trading.
Derivatives are hedging instruments globally, but in India not many retail investors are aware of this purpose. SEBI can also consider introducing long-dated derivative contracts on individual stocks and restrict retail traders to those alone, based on their cash holdings.