Irresistible pull: What's driving the stupendous rise in the turnover of equity derivatives?

The annual report of the Securities and Exchange Board of India (Sebi) for FY23 has interesting insights about all sections of the capital markets. One among them will make you sit up. It’s about the stupendous rise in the turnover of equity derivatives, also known as the futures and options (F&O) segment; that too at a time when the cash market turnover actually declined.    

“During FY23, the Indian derivatives market displayed significant growth in contrast to the cash market,” says the Sebi report. 

“While the cumulative trading turnover of the equity cash segment declined by 20 per cent in FY23 compared to FY22, the equity derivatives segment witnessed a rise of 119 per cent in notional turnover over the period, led by proprietary traders and individual investors,” the report says.   

In absolute terms, the cumulative turnover of the F&O segment on the BSE and the National Stock Exchange (NSE) in FY23 was Rs 38,566 lakh crore compared to Rs 17,613 lakh crore in FY22, with the NSE accounting for 99.11 per cent of the total turnover.  

But is a rise in F&O trading turnover desirable? It is, but not if the segment showing the surge is notorious for making investors lose their money on most occasions, as is the case here. Also, the data has to be seen in the context of an analysis conducted by the country’s capital markets watchdog.  

The Sebi analysis earlier this year showed that despite the number of individual F&O traders increasing exponentially between FY19 and FY22—from 0.71 million to 4.52 million—nine out of 10 individual traders incurred net losses to the tune of Rs 50,000 on average in FY22.  

Not only did they incur net trading losses, they also paid an extra 28 per cent of net trading losses in transaction fees. 
The irony is that even those traders who made some money had to pay transaction costs of 15-50 per cent of their total profit.  

The analysis was based on a sample of all individual clients of the Top 10 stockbrokers, accounting for 67 per cent of the overall individual client turnover in the equity F&O segment during FY22. 
Investors, therefore, need to tread with caution.  
     
@ashishrukhaiyar