SUMMARY
- SEBI’s new derivatives rules may reduce Zerodha’s overall trades by around 30%.
- SEBI limits weekly index expiry to one per exchange and increases contract sizes.
- The board aims to curb speculative trading and improve safety amid high F&O market losses.
Nitin Kamath, CEO and Co-founder of Indian fintech firm Zerodha anticipates a 30% decrease in trades on the online brokerage platform due to the new derivatives framework implemented by the Securities and Exchange Board of India (SEBI).
Kamath stated in a post on X on October 3, that approximately 60% of “overall” futures and options (F&O) trading will probably be impacted by the regulator’s new orders, which include one weekly expiry of index derivative per exchange and an increase in contract sizes. Kamath added, “Here’s the potential impact of only one weekly expiry of index derivatives per exchange and contract sizes increasing by around 2.5X. Assuming that those trading weekly don’t move on to trading monthly, the impact will be ~60% of overall F&O trades and ~30% of our overall orders.”
This occurred just a few days after the market regulator implemented several new measures to cool off the soaring Indian F&O market. The additional directives include raising the minimum contract size for index derivatives to ₹15 Lakh, restricting weekly expiry derivatives to just one benchmark index per exchange, and requiring buyers to pay option premiums upfront. The amended regulations will take effect on November 20.
Kamath anticipates that after the deadline of November 20, when the new regulations will take effect, things will become “much clearer”. Then, based on how the new standards affect the bottom line of the business, Zerodha will review its pricing strategy. He wrote on X, “I guess things will become much clearer from November 20th. We will then decide on our change in pricing structure, based on the impact on the business.”
The action by SEBI coincides with market analysts labelling the F&O market as a place to lose money rather than as “a newfound path to quick riches.” 93% of traders in the F&O segment lose money, according to SEBI research, and these traders keep coming back to the market in an attempt to make a quick profit even when they have already lost money.
Since the nation was experiencing an excess of options trading, SEBI Chairperson Madhabi Puri Buch stated earlier this year that the market regulator was willing to remove “some derivative products” from the market due to the volume of demand.
To improve investor safety and market stability, the regulator released a consultation document in July of this year, asking for input from stakeholders on seven recommendations to update the index derivatives framework. Six suggestions were eventually produced by the regulator two months later in an attempt to cool the Indian futures market and stop the F&O frenzy. The standard pricing structure implemented by SEBI earlier this week is anticipated to have a significant impact on the profitability of online broking players like Groww, Zerodha, and Upstox, according to credit agency ICRA.
