Retail traders remain at the wrong end of the stick when it comes to equity derivatives trading, with 93 per cent of them incurring an average loss of Rs 2 lakh per trader during the last three financial years, as per an analysis by the Securities and Exchange Board of India (
Sebi).
The new report highlights the increase in loss-making individual investors in the futures and options (F&O) segment to 91.1 per cent in FY24, compared to 89 per cent in FY22.
The findings hold significance in shaping the market regulator’s policy-making when it comes to regulating the F&O segment, where daily turnover often exceeds Rs 500 trillion.
Sebi has proposed seven key measures—aimed at curbing retail participation and speculation in the derivatives market—that are likely to be cleared at its upcoming board meeting at the end of the month.
Financial regulators, including the Reserve Bank of India (RBI), have repeatedly cautioned investors about the risks in the derivatives market and the higher chances of facing losses.
A critical concern pointed out by the report is that despite consecutive years of losses, more than three-fourths of the loss-making traders continued their activity in F&O.
As per data on the exchanges, the average daily turnover surged to a record high of Rs 540 trillion in September, compared to nearly Rs 360 trillion a year ago.
While 99.8 per cent of F&O traders are individual investors, they contributed only 30 per cent of the total turnover in FY24. The number of retail traders has almost doubled in the last two years, from 5.1 million in FY22 to 9.6 million in FY24.
“Arise in individual traders’ participation in the F&O segment has also kick-started a debate on product suitability and the need for safety nets and firewalls for individual investors,” said Sebi in its report.
In FY24, nearly 7.3 million individual traders lost money, with an average net loss of Rs 1.2 lakh per person, inclusive of transaction costs.
In contrast, foreign portfolio investors (FPIs) and proprietary traders booked gross trading profits of Rs 28,000 crore and Rs 33,000 crore, respectively, in FY24.
Algo traders—those using sophisticated technology and algorithms for trading—took the larger share of the pie.
“Most of the profits were generated by larger entities that used trading algorithms, with 97 per cent of FPI profits and 96 per cent of proprietary trader profits coming from algorithmic trading,” pointed out the Sebi report.
Certain market participants have raised concerns about overseas algo traders raking in profits from the Indian market at the cost of household savings from retail investors.
The aggregate losses of 11.3 million individual traders exceeded Rs 1.8 trillion over the three-year period between FY22 and FY24. In FY24 alone, individuals incurred about Rs 75,000 crore in net losses.
The top 3.5 per cent of loss-makers (around 4 lakh traders) faced an average loss of Rs 28 lakh per person over the last three financial years.
“Only 7.2 per cent of individual F&O traders made a profit over the period of three years, while only 1 per cent of the individual traders managed to earn profits exceeding Rs 1 lakh after adjusting for transaction costs.
A major concern pointed out by the report was that over 75 per cent of the individual traders had declared an annual income of less than Rs 5 lakh. Further, the proportion of traders below 30 years rose from 31 per cent in FY23 to 43 per cent in FY24.
Nearly three-fourths of the traders were from beyond the top 30 cities—a higher proportion compared to that of mutual fund investors, which stands at 62 per cent.
“This rapid growth in F&O trading activity has once again highlighted the need for investor education and risk management practices, as a significant proportion of retail traders continued to incur losses in the market,” said the Sebi report.
