Sebi takes stock of surge in options trades

Mumbai: Worried about the increased shift in trading activity from cash market to options, the Securities and Exchange Board of India (Sebi) has asked bourses and brokers to boost investor awareness, especially among the new entrants, about the risks of such instruments.In a meeting with top executives of market intermediaries recently, the capital markets regulator is said to have asked the reasons behind the surge in options trading.Sebi officials sought the views of these market intermediaries on whether the increase in option positions was for hedging or directional bets, said three people familiar with the discussions. Sebi did not respond to ET’s queries on the matter. Both BSE and NSE said they have already increased investor awareness efforts in recent times.Options have gained popularity in recent years because of easier funding, allowing traders to take bigger bets at cheaper costs compared to shares. They are also perceived to be less risky than futures. For the buyer, the maximum risk is the premium he pays to purchase the option. An options seller — the counterparty — faces the risk of unlimited losses, in theory.“Cost-wise, buying options is much cheaper now than intraday trading while writing options is also easy with brokers accepting shares as collateral,” said Prakarsh Gagdani, CEO, 5Paisa Capital.Sebi is concerned that retail traders — especially the new entrants — are taking bets without understanding the risks. Exchanges and brokers are considering designing a system to send popups to those retail investors with outstanding unhedged positions with a message explaining the risk involved in such transactions.The shift to options has accelerated with the implementation of the first leg of the tighter peak margin rule starting in December 2020. 85988904Cash market volumes have declined by 8%, while the turnover on the options segment surged 160% from a daily turnover of Rs 27 lakh crore in November 2020 to Rs 63 lakh crore in September 2021.Sebi’s new framework on peak margin requirements could have also dented activity in the futures segments. Under the new peak margin norms, brokers must collect upfront margins on a leveraged trade. Earlier, brokers collected them at the end of the trading day. From September 1, the peak margin requirement was raised to 100%, which meant traders had to pay the entire margin before the transaction. “In options, investors with hedged positions enjoy the benefit of very low margins, but in cash and futures trading, clients will have to keep 100% margins in place now,” said Sandeep Bhardwaj, CEO, IIFL Securities.In August, the average daily options volumes were Rs 59.37 lakh crore, compared with Rs 42.15 lakh crore in May and Rs 34.70 lakh crore in January. Volumes in the cash market have declined consistently from Rs 84,300 crore a day in May to Rs 68,173 crore in August, down 19%. The average daily volumes of the futures segment on both the exchanges were Rs 1.06 lakh crore in August compared with Rs 1.17 lakh crore in May or Rs 1.25 lakh crore in January.The chief executive of a leading broking firm said the growing share of options turnover reported in India is misleading as it is based on the entire value of transactions rather than premiums.

from Economic Times https://ift.tt/3jN5Qow