The Sensex and Nifty50 have outperformed most major international indices in the last few months. While BSE Sensex gained 17% in 2024 and secured fourth spot among major global bourses, Nifty50 rose 18.7% this year and came 3rd. This is led primarily by the country’s economic outlook and positive investor sentiment. With rising trading activity in the country, specific interest has been observed in the derivatives segment, which is said to be mainly coming from retail investors. As retail participation in derivatives continues to rise, there is also a noticeable surge in losses incurred by individual traders.

Securities and Exchange Board of India (SEBI) has been constantly monitoring this development and to this end, it has notified certain rules changes around derivatives trading. The idea is to contain the risks that come with derivative trading, when it comes to individual stocks. Let’s take a look at the new derivatives rules by SEBI and how it is likely to impact your trading journey.

What are SEBI’s New Derivative Rules

In its new directive, SEBI has notified that individual stocks must pass through certain criteria to be eligible for derivatives trading. So what are these criteria?

1. The stock’s market wide position limit (MWPL), over the period of previous six months, on a rolling basis must be atleast ?1,500 crore to be eligible for derivatives trading.

2. The average daily delivery value of a stock in the cash market for the previous six months must be at least ?35 crore on a rolling basis. This is an increase from the current ?10 crore limit. 

3. A stock's Median Quarter Sigma Order Size (MQSOS) over the previous 6 months (on a rolling basis) must now be ?75 lakhs instead of ?25 lakhs earlier.

4. SEBI will also take into account factors such as surveillance concerns, ongoing investigations, and other administrative considerations when evaluating a stock for inclusion in the derivatives segment.

SEBI also wants to make sure that the number of trades in derivatives does not exceed the actual stock trades in the market. This is mainly to prevent large-scale speculation and make trading safer, especially for retail investors.

Impact of SEBI's New Rules On Derivatives Trading

Derivatives trading now accounts for a significant portion of the total market volume. SEBI’s rule changes primarily aims to minimise market volatility in the derivatives segment. It wants to ensure that derivatives trading involves more liquid and stable stocks. While The market regulator is primarily focused on protecting retail investors from market manipulation and increased volatility.

SEBI’s changes to derivative trading rules could result in fewer stocks being available for derivatives trading. As per experts, many of the 182 stocks that are currently available in the derivatives market may not qualify as per SEBI’s new rules. Interestingly, the number of stocks available for derivatives trading in March 2018 was 209.

Although the new rules could mean fewer stocks for derivatives trading and thereby limited trading opportunities, they are expected to bring down the risks associated with this trading category. This is because derivatives trading is highly speculative and currently features many illiquid stocks.

Currently in India, retail investors make up 35% of derivatives trading. With these changes, the market regulator expects to see a shift in investor approach towards more stable, long-term investments in stocks. Higher liquidity and broader market participation is what SEBI is aiming for.

Investor Concerns and Market Reactions to SEBI’s Tightened Rules

SEBI aims to align derivatives trading with the cash segment or regular stock trading volumes. This is to bring down the risk of market manipulation, primarily in less liquid stocks. Now, you might be concerned that these changes could potentially limit your trading opportunities, especially if you prefer to trade in small-cap or high-risk stocks. However, the market regulator has designed these rules to control high levels of speculation and reduce market volatility. This will potentially help in protecting your capital from large losses. By restricting derivatives trading to more stable and liquid stocks, SEBI is aiming to create a safer environment for you in the stock markets.

To conclude

With these new derivative rules SEBI plans to create a safer and stable environment for you to benefit from trading while avoiding large-scale losses. As the Indian financial markets continue to evolve, it is the market instability that is particularly important for the regulator. You must consider these new rules as one form of reminder that although derivatives trading could be profitable, it also comes with significant risks.

To strategies and up your F&O trading game, you can check out useful tools and resources offered by Sharekhan. These are sure to help you get a better hold of derivatives trading and easily navigate the complex world of stock markets.