India's SEBI Aims to Curb Speculative Options Trading Frenzy

India's Securities and Exchange Board (SEBI) has proposed new measures to address the "expiry day frenzy" in options trading, as explained by a senior official on August 2, 2024. These proposals aim to mitigate speculative trading activities that intensify as option contracts approach expiration.

Ananth Narayan, a wholetime member at SEBI, elaborated on the regulator's intentions during an industry conference in Mumbai. The proposed changes include reducing the frequency of contract expirations and increasing minimum trading amounts.

Narayan highlighted the risks associated with near-expiry trading, comparing it to casino gambling. He stated, "Trading in index options – specifically close to expiry - starts to resemble a slot machine in a casino." This comparison underscores the regulator's concerns about the nature of these trading activities.

Data from the National Stock Exchange of India (NSE) reveals the scale of the issue. According to Narayan, in the financial year ending March 31, 2024, approximately 9.2 million investors collectively lost 519 billion rupees ($6.20 billion) trading in derivatives. Notably, 99% of these individuals traded in index options, while only 7% engaged in futures trading.

SEBI's proposed regulations aim to address several key issues:

• Reduce the number of contracts expiring each week
• Increase minimum trading amounts
• Limit speculative trading activity near contract expiration
• Enhance market stability
• Mitigate potential manipulation risks

The regulator's concerns extend beyond individual investor losses. Narayan emphasized that the "frenzied hyperactivity" in index options on expiry days raises questions about market stability and potential vulnerability to manipulation.

These proposals reflect SEBI's ongoing efforts to regulate and improve the Indian securities market. Established in 1992, SEBI has implemented numerous reforms to enhance market efficiency and protect investors. The Indian derivatives market, introduced in 2001, has grown to become one of the largest globally, necessitating continuous regulatory oversight.

As the Indian stock market continues to evolve, SEBI's proposed measures represent a significant step towards creating a more stable and less speculative trading environment. The regulator's focus on curbing "expiry day frenzy" demonstrates its commitment to maintaining market integrity and protecting investor interests in an increasingly complex financial landscape.

"This frenzied hyperactivity in index options on expiry day has little discernable benefits."

The outcome of these proposals and their impact on India's derivatives market will be closely watched by investors, traders, and market observers in the coming months.