A recent study by the Securities and Exchange Board of India (SEBI), the regulator of the Indian capital market, has revealed that 9 out of 10 individual traders in the equity futures and options (F&O) segment continue to incur significant losses. The aggregate loses of individual traders exceeded Rs 1.8 lakh crore over the three-year period between fiscal years 2022 and 2024. This study follows up on a report published by SEBI in January 2023, which found that 89 per cent of individual equity F&O traders lost money in fiscal 2022. With the increased participation of individual investors in equity and equity derivatives markets, the current study was undertaken to analyse profit and loss patterns of individual traders in F&O during the 3-year period (2022 to 2024), and for all the categories of investors in F&O during fiscal 2024.

The study found that 93 per cent of over 1 crore individual F&O traders incurred average losses of around Rs 2 lakh per person over the same period. Only 1 per cent of individual traders managed to earn a profit exceeding Rs 1 lakh after adjusting for transaction costs.

In contrast to individual traders, proprietary traders and foreign portfolio investors (FPI) as a class booked gross trading profits of Rs 33,000 crore and Rs 28,000 crore respectively in FY2024. Against this, individuals and others incurred a loss of over Rs 61,000 crore in FY2024.

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 traders’ profits coming from algorithmic trading.

A disturbing finding is the increasing participation of young (below 30 years) city traders. The proportion of young traders in the F&O segment rose from 31 per cent in FY2023 to 43 per cent in FY2024.

These are worrisome facts. That a majority of young traders — close to 93 per cent — incurred losses emphasises the urgent need for financial education and risk awareness among this demographic.

A concerned SEBI has started taking steps to curb speculative trading in index derivatives, including restricting multiple options contract expiry and raising the size of options contracts. As the F&O market continues to evolve, it remains critical for investors to be cautious and understand the risks associated with derivatives trading. What is surprising is that despite losing heavily, this category continues to participate in F&O trading, highlighting the allure and risks associated with derivatives trading.

Concerned over the recent surge in speculative bets on individual stocks through F&O contracts, SEBI has come out with several measures to curb excessive speculative activity, including a hike in the securities transaction tax (STT). But experts point out that this is not the real solution. Even the increase in STT will not lead to a decline in options volumes. If speculation is to be reduced, a product suitability framework should be introduced to deter non-serious traders. This measure will be more effective in reducing speculative activity.

To address the evolving market structure, SEBI has proposed that position limits for index derivatives should be monitored intra-day by clearing corporations and stock exchanges. To mitigate such leverage risks in options contracts nearing expiry, SEBI proposes increasing the margin on expiry day and the preceding day. This measure aims to curb the high notional risk associated with near-expiry options trading.