Sebi’s six-step measures expected to reduce F&O volumes by up to 40% | Stock market today

The new rules will also limit weekly expirations to one benchmark per exchange, provide intraday monitoring of position limits, and remove the processing of calendar spreads on expiration days.

These measures aim to raise the barrier to entry for retail investors whose losses have increased, according to a recent study by the watchdog.

Analysts had estimated that the restrictions could lower volumes on the National Stock Exchange (NSE) by almost a third. In September, the average daily trading volume for the spot market segment of the NSE stood at Rs 394 trillion, while that of the BSE was around Rs 144 trillion.

In addition to the new restrictions on derivatives, futures trading volumes are also expected to be affected by the increase in the securities transaction tax, which took effect on Tuesday.

Further, many expect volumes to shift to the Gujarat International Finance Tec-City (GIFT City) in Gujarat, where GIFT Nifty contracts are traded on the NSE International Exchange (NSEIX).

“Limiting weekly expiries to a single index on the NSE and BSE could encourage a shift in trading volumes towards GIFT City, which still offers a wider range of weekly options. From a foreign portfolio investor’s perspective, this creates an attractive opportunity for those looking for flexibility in their trading strategies,” said Rohit Agarwal, managing director of the funds business at Dovetail Capital.

“While the NSE remains the dominant player, with a monthly average of 10.8 billion equity derivatives contracts in 2023-2024, GIFT City, although growing, represents less than 1 percent of the NSE’s volume with approximately 2 million contracts traded monthly. However, the transition will largely depend on GIFT City’s ability to build liquidity and market depth to support this shift,” Agarwal added.

As for onshore trading, the impact of the new measures on the BSE may be less than on the NSE, given its relatively lower reliance on index options expiring within the week – which will now be limited to one.

Index derivatives trading accounts for a significant portion of revenue for brokers and exchanges.

Zerodha, the largest broker in terms of profitability, estimated a 30 to 50 percent drop in revenue due to these changes.

Brokers are considering diversifying their revenue streams to compensate for declining revenues.

NSE’s revenue from transaction fees stood at Rs 3,623 crore in the first quarter of 2024-25. The same for BSE was Rs 366 crore. The majority of this amount comes from the F&O segment and increased due to increased activity.

Three of the market regulator’s key measures will come into force on November 20, while others will come into force from February and April next year.

According to an earlier IIFL Securities report on the NSE published in late August, Sebi’s moves could reduce the bourse’s revenue by 20-25 per cent.

Global trade body Futures Industry Association believes that while the intent of Sebi’s action is justified, the new measures could end up inflating the cost of trading.

“Liquidity providers could also face increased margin costs, leading to wider bid/ask spreads and creating market distortion. These higher spreads will ultimately be absorbed by retail traders, creating unintended additional costs for retail and institutional investors,” he said in his submissions to Sebi’s consultation paper released in July on product restrictions. derivatives.

Higher barriers to entry could lead some retail players to take disproportionately higher risks, some say.

A Sebi expert panel is expected to monitor the impact of the proposed changes and go back to the drawing board in case further follow-up measures are warranted.

First publication: October 2, 2024 | 7:43 p.m. STI