Retail Traders in F&O: A Losing Battle?

The Securities and Exchange Board of India – SEBI report was released recently that illuminates the difficult circumstances that retail traders in the equity derivatives market must deal with. 93% of individual futures and options (F&O) traders have lost an average of Rs 2 lakh per dealer over the last three fiscal years, the survey claims.

With the percentage of investors seeing losses increasing from 89% in FY22 to 91.1% in FY24, the data depict a dire picture. SEBI has been forced to take new safeguards in response to this development in order to shield regular investors from the hazards associated with the F&O market, whose daily turnovers frequently surpass Rs 500 trillion. 

The Reality of F&O Trading for Retail Investors

Retail involvement in the derivatives market keeps rising in spite of cautions from financial regulators such as SEBI and the RBI. September saw an all-time high of Rs 540 trillion in average daily turnover in the finance and operations (F&O) segment, up from Rs 360 trillion in January. Even so, just 30% of market turnover is contributed by retail traders, who account for 99.8% of the market. 

It is concerning to note that over 74% of these traders continue to cause losses in the market despite years of losses. A report released by SEBI states that in FY24, 7.3 million individual traders lost money. The average trader’s loss, including transaction costs, was Rs 1.2 lakh.

The Big Winners: Institutional and Algorithmic Traders

Foreign portfolio investors (FPIs) and proprietary traders continue to record large returns while regular investors experience growing losses. Profits from trading were reported by FPIs at Rs 28,000 crore and by proprietary traders at Rs 33,000 crore in this fiscal year. Nearly all of these gains—roughly 97% for FPIs and 96% for proprietary traders—came from algorithmic trading, a sophisticated type of trading that makes use of cutting-edge technology and computational techniques.

Market players are concerned about this, claiming that foreign algorithmic traders are making money off of the household savings of ordinary investors. Over the last three years, 11.3 million individual traders have lost more than Rs 1.8 trillion in total losses; in FY24 alone, retail investors have lost Rs 75,000 crore.

A Call for Action: SEBI’s Response

SEBI has suggested seven important steps to reduce retail involvement and speculation in the derivatives market in light of these findings. As the discussion about whether or not F&O products are appropriate for retail investors heats up, these steps—which are anticipated to be approved by the end of the month—aim to provide firewalls and safety nets for individual traders. 

The report’s analysis of the dealers’ demographics is among its more alarming features. More than 75% of individual dealers reported making less than Rs 5 lakh annually, while the percentage of traders under 30 has increased from 31% in FY23 to 43% in FY24. In addition, compared to 62% of mutual fund investors, approximately 75% of these traders come from cities outside the top 30. 

The Need for Investor Education

The explosive rise in F&O trading has brought attention to the critical need for improved risk management and investor education. According to SEBI’s results, a sizable percentage of ordinary traders still experience large losses, underscoring the significance of financial literacy—especially in a market as complicated and high-risk as derivatives. 

Key Findings:

• 91.1% of individual investors in F&O incurred losses in FY24, up from 89% in FY22.
• SEBI has proposed seven measures to curb retail speculation in derivatives.
• The average daily turnover in F&O surged to Rs 540 trillion in September, up from Rs 360 trillion a year ago.
• Market participants are raising concerns about the impact of overseas algo traders.
• 75% of retail traders declared annual incomes under Rs 5 lakh.
• A growing number of traders, 43%, are under 30 years old, with most hailing from beyond the top 30 cities.

The issue still stands: will these suggested changes be sufficient to shield individual traders from the market’s inherent hazards as retail involvement in F&O increases? Time will tell.

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