Capital market regulator the Securities and Exchange Board of India (Sebi) is considering additional safeguards for investors after its recent study on derivatives trading revealed several positive and negative trends and possible mitigation areas to prevent losses.
The report, released on Wednesday, showed that nine out of 10 individual traders in the equity futures and options (F&O) segment suffered considerable losses in the financial year 2021-22.
The study analysed the profits and losses of individual traders and the recent trends in investors’ participation in the derivatives market. In a press statement, Sebi said it would consider additional safeguards to protect investors from losses in the market . This could include increasing investors’ market awareness, risk exposure, and brokers’ enhanced warnings to clients.
What the Sebi Study Showed
The study, titled “Analysis of Profit and Loss of Individual Traders dealing in Equity F&O Segment,” analysed data from FY2018-2019 to FY2021-2022 to compare trades before and after the Covid-19 pandemic.
There had been over a 500 per cent increase in the number of individual traders in the derivatives market in FY2021-22 compared to FY2018-19. Ninety-eight per cent of them traded in options in FY2021-22, of which nine out of 10 suffered net losses in both financial years.
Loss makers, on average, saw losses close to Rs 50,000 in FY2021-22. The average absolute net loss was over 15 times the net profit made by a profit maker. Besides net trading losses, loss makers took an additional blow of 28 per cent in transaction costs, Sebi said in the release.
Interestingly, the study also analysed the gender gap in participation in the F&O segment. Female participation rose from 16 per cent to 19 per cent from FY2018-2019 to FY2021-2022. Those in cities other than Tier-3 and above comprised 79 per cent of total individual investors.
Additionally, net profit makers had to shell out 15 to as high as 50 per cent of their profits in transaction costs. Sebi noted that regular data analysis and disclosure could significantly enhance investor awareness of the market risks. The regulator said it would soon issue guidelines concerning additional risk disclosures that brokers and exchanges must make to investors.
Key Facts In A Nutshell
· 89 per cent of individual traders suffered losses in the equity F&O segment, with an average loss of Rs 1.1 lakh in FY22.
· 90 per cent of active traders saw average losses of Rs 1.25 lakh in the same period; active traders (excluding outliers), on average, suffered net trading losses close to Rs 50,000.
· 11 per cent of individual traders made an average profit of Rs 1.5 lakhs. The percentage went down marginally to 10 per cent for active traders, though the average profit made by them went up to Rs. 1.9 lakh during the same period.
· Of the active traders (excluding outliers), 6 per cent of individual traders in the equity F&O segment made an average profit of around Rs 3,400 in FY22.
· The top 1 percent and 5 percent active profit makers accounted for nearly 51 per cent and 75 per cent of the total net profit earned by all active profit makers, respectively.
· The number of individual traders went up by nearly 8 and 5 times, respectively, in the last 3 years.
· Among the unique individual traders, 98 per cent traded in options, while 11 per cent traded in futures during FY22 compared to 89 per cent and 43 per cent, respectively, during FY19.