Indian stock markets are recently witnessing a significant rise in trading activity specifically in the derivatives segment. With increasing retail participation, there has also been a surge in losses incurred by individual traders. To curtail such losses and protect investor interest, Securities and Exchange Board of India (SEBI) has notified some changes in rules around derivatives trading in individual stocks. These rules could help reduce the risks associated with derivative trading, primarily in smaller or less liquid stocks.
SEBI has notified that individual stocks must meet certain criteria to qualify for trading in the derivatives segment. A stock’s market-wide position limit (MWPL), over the period of the previous six months, on a rolling basis, must be at least ₹1,500 crore to be eligible for derivatives trading. SEBI has also revised the average daily delivery value of a stock in the cash market (for the previous six months on a rolling basis) from ₹10 crore to ₹35 crore. The market regulator now requires a stock's Median Quarter Sigma Order Size (MQSOS) over the previous 6 months (on a rolling basis) to now be ₹75 lakhs instead of ₹25 lakhs earlier.
SEBI has also notified that it will take into account factors such as surveillance concerns, ongoing investigations, and other administrative considerations while evaluating a stock for inclusion in the derivatives segment.S
Derivatives trading now accounts for a significant portion of the total market volume. SEBI’s new rules primarily aims to minimise speculative trading in the derivatives segment. It wants to restrict derivatives trading to more liquid and stable stocks. While speculative trading can lead to significant profits, it can also cause substantial losses, especially in illiquid stocks. Therefore, the market regulator is focused on protecting retail investors from such high-risk trades.
SEBI’s derivatives rule changes will likely mean fewer stocks available for derivatives trading. Market experts and traders believe that many of the 182 stocks currently in the derivatives market may not meet SEBI’s new rules, which could likely reduce the number of eligible stocks in the market.
Although the new rules may limit your trading opportunities, they could significantly reduce the risk of trading in highly speculative and illiquid stocks. Retail investors currently make up 35% of derivatives trading in India, and these changes could shift the focus to more stable, long-term investments in stocks that have higher liquidity and broader market participation.
SEBI’s motive is to align derivatives trading more closely with cash trading volumes and consequently reduce the risks of market manipulation, especially in less liquid stocks. Now, as an investor, you may be concerned about the potential reduction in trading opportunities under the new rules. If you frequently trade in stocks that are small-cap and high-risk, then these new rules are likely to restrict your options. However, the new rules can bring down excessive speculation and market volatility, thereby protecting you from the risk of significant losses.
It is evident from these notified derivative rules that SEBI wants to create a safer and more stable stock market for retail investors in India. The objective is to minimise the risks of speculative trading, which often leads to market instability, particularly in illiquid stocks. These regulations serve as an important reminder that while derivatives trading can be profitable, it also carries significant risks.
If you want to explore F&O trading with confidence, you can explore Sharekhan. It offers tools and insights to help you easily navigate the complex world of derivatives trading within SEBI’s framework.
Disclaimer: This is a syndicated feed. The article is not edited by the FPJ editorial team.
