F&O Frenzy: Will Sebi Require Exam For Trading?

The Indian stock market has experienced a significant surge in participation since Covid, nearly tripling over the past five years.

Even more impressive is the accelerating rate at which new investors are entering the market. For example, the latest one crore increase in unique investors—from eight crore to nine crore—took only five months, compared to nine months it took to increase from six crore to seven crore.

This exponential growth signals a growing culture of equity investment, fostering broader participation in economic growth and wealth creation.

However, alongside this increasing household participation in stock markets, there are concerns about the sharp surge in retail investors trading in futures and options (F&O).

Analysts, market regulator Sebi, and even Finance Minister Nirmala Sitharaman have cautioned against this unabated rise in retail participation in the derivatives market. They are calling for stricter norms to rein in investors dabbling in the wild west of the capital markets.

According to the latest media reports, the revised norms could include increasing the margin requirement, tightening the eligibility criteria, and net worth disclosure for investors.

This means that trading in options will become more expensive, raising the barrier to entry for small investors. Even if retail traders have enough funds, stricter eligibility criteria—potentially demanding greater knowledge and experience—could pose hurdles. This aims to ensure that only well-prepared individuals engage in these intricate financial activities, safeguarding against risks in the market.

But let's step back and understand what all the fuss is about in the first place.


The surge in the F&O segment has been staggering, with unique investors skyrocketing to 45.2 lakh in fiscal year 2022 from just 7.1 lakh in FY19.

What's concerning is that a significant 89% of traders in this segment reported losses, with the average loss amounting to around Rs 1.1 lakh. Even Sebi Chairman expressed surprise last November at the persistence of trading in this area despite the odds stacked against traders.

A 2023 report titled “Gamification of Indian equities” shed light on the derivatives to cash volume ratio in India, which stood at a striking 422. In comparison, Germany recorded a ratio of 36, and the US stood at nine.

The report attributed this surge in derivatives trading to changes in contract structures, higher leverage, and the ease of trading facilitated by trading apps.

So perhaps by increasing trade restrictions, the regulator can put a plug on this boom in the derivatives market.


Interestingly, back in April, the National Stock Exchange (NSE) announced a revision in lot sizes, reducing the lot size for Nifty50 from 50 to 25. The bourse also cut the market lot of Nifty Financial Services to 25 from 50 and Nifty Midcap Select to 50 from 75.

Sounds rather counterintuitive right? Reducing lot sizes could lower the entry ticket size and potentially exacerbate the problem.

Also, note that the regulator and the government may not want to completely bar retail investors from the F&O segment as it accounts for a significant chunk of revenue for the exchanges and government.

Thus, regulatory changes will likely focus on curbing the least experienced traders to reduce risks without substantially impacting overall market participation and revenue.

By striking a balance between encouraging market participation and safeguarding inexperienced traders, regulators aim to sustain the growth of the Indian stock market while minimizing undue risk. This dual approach seeks to foster a more robust and resilient investment environment, ensuring long-term economic growth and wealth creation for a broader spectrum of the population.

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