India’s market regulator on Thursday warned of rising risks from a surge in derivative trading volumes, with small investors jumping in to trade risky options contracts.
A booming Indian stock market has drawn retail investors to the riskiest corners of the market, with their share of derivative trading volumes rising from 2% in 2018 to 41% now, according to Madhabi Puri Buch, chairperson of the Securities and Exchange Board of India (SEBI).
The notional value of index options traded more than doubled in 2023-24 to $907.09 trillion from the year before.
“A large amount of household savings are going into speculative trading,” said Buch. “This could lead to systemic risks and investor protection concerns.”
Speculation via short-term derivative contracts is also a concern, Buch added, noting that a committee has been set up to examine steps needed to curb this frenzy.
The comments follow a warning from India’s federal Finance Minister Nirmala Sitharaman, who said last month that an unchecked explosion in retail trading of futures and options can create future challenges not just for the markets, but also for investor sentiment and household finances.
A report released by India’s central bank earlier on Thursday echoed those concerns.
The regulator also introduced new criteria to decide on stocks that can be linked to derivative products, such as futures and options, as proposed in a discussion paper earlier this month. The total number of stocks eligible for derivative trading will rise marginally, Buch said.
Separately, the regulator asked brokers and mutual funds to stop using the services of unregulated financial influencers for marketing and advertising campaigns. This decision aims to address concerns related to “certain persons, including unregulated entities, inducing investors to deal in securities based on inappropriate claims,” SEBI said in a press statement issued after a board meeting.
However, financial influencers engaged in investor education will be exempt from the new restrictions.
India had 154 million trading accounts as of April 2024, according to SEBI data, marking a more than fourfold jump from the 36 million trading accounts in April 2019.
