The Securities and Exchange Board of India (SEBI) issued a consultation paper titled “Measures to Strengthen Index Derivatives Framework for Increased Investor Protection and Market Stability” on July 30, 2024. SEBI introduced the paper to prevent retail investors from practising entirely speculative trading, which was steadily gaining popularity. Purely speculative trading puts investors at a higher risk of capital losses and creates opportunities for market manipulations. It also makes it difficult to determine a company's actual value. So, what changes are recommended by SEBI, and how does it impact investors? Let’s find out.

Key Changes Recommended in New SEBI Rules

SEBI has announced some new eligibility criteria in their consultation for stocks to be eligible for F&O trading. Similarly, guidelines have been mentioned for removing stock listings from F&O trading if they become inactive. Let’s review each of the proposed changes in detail.

Proposed Futures And Options Trading Eligibility

1. For F&O trading eligibility, companies must be among the top 500 in India in terms of market capitalisation and daily trading activity.

2. A limit has been proposed by SEBI of ?1,500 crores on the amount of money that can be bet on any particular stock through F&O contracts.

3. To be eligible for future and option trading, stocks must show enough liquidity by meeting higher minimum daily trading volumes and order sizes.

4. Shares need to be bought and sold worth ?35 crore daily for inclusion in the F&O listings.

5. Lastly, the minimum acceptable order size variability has been raised to ?75 lakh. This ensures that the underlying stock has enough activity for inclusion in F&O.

F&O Listing Removal Guidelines

1. To keep their F&O listing active, stocks need to have at least 15% of active traders or 200 members, whichever is lower, to have traded the underlying stock.

2. The stock's daily trading turnover needs to be over ?75 crore, and there needs to be significant cash market trading activity.

3. Stocks with minimal cash market trading and low liquidity will be removed from F&O trading.

4. Lastly, the notional open interest of the underlying stock needs to be at least ?500 crore.

SEBI has proposed that all stocks listed and to be listed for F&O trading must fulfil the criteria mentioned above to avoid having their listing removed from F&O trading. However, the eligibility criteria must only be fulfilled by stocks that have been in the F&O segment for at least six months.

Why Are The Changes Recommended?

Initially, Futures and Options trading was introduced to help investors hedge their investment risks. However, the primary reason for introducing these new changes was increased speculative bets on individual stocks through F&O contracts. Since these contracts allow investors to bet on stock prices without actually buying or selling the shares, it makes it difficult for investors to determine the company’s actual value.

According to a January 2023 SEBI report, the market regulator noticed an increase in F&O trading volume from ?7 lakh in 2019 to ?45 lakh in FY 22. Since 2022, the aggregate turnover in the equity derivatives segment of NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) grew to ?9,504 lakh crore in May 2024.

The Serious Truth About SEBI's New Rules For F&O Trading

The same report also stated that between FY 19 and 22, nine out of ten individual traders engaged in the equity F&O segment incurred losses. The average loss of individual traders amounted to ?1.1 lakh during FY 22. This is one of the reasons SEBI recommended the new changes: to protect investor interests and prevent capital losses for traders. Another reason for introducing the new regulation was trends like last-minute buying sprees on expiring contracts. These types of short-term bets are not suggestive of long-term investment strategies and can be highly risky for traders.

Impact of These Changes on Investors

The SEBI proposed changes have two main impacts on investors. They will make F&O trading less speculative and offer better liquidity to the market. Let’s understand these effects in detail.

1. Decreased Speculation: The new regulations will discourage market trends like last-minute buying sprees on expiring contracts and force traders to use long-term investment strategies. A reduction in entirely speculative bets on F&O contracts has the potential to help investors reduce the capital risks of F&O trading.

2. Improved Liquidity: Improved liquidity in the F&O segment is expected to make the segment more reliable for investors. The proposition to remove stocks that are not traded enough is expected to make it more difficult for smaller and less traded companies to manipulate the market with speculative F&O contract trading. Lastly, improved liquidity also allows investors to enter and exit the F&O segment easily.

Conclusion

The SEBI new rules for options trading segment are expected to increase its reliability and popularity among traders while curbing some of the negative market trends. If you are interested in F&O trading and would like to learn more about the important concepts to help improve your knowledge as an investor, check out the Sharekhan Knowledge Center today.