SEBI Targets Expiry Day Frenzy in Options Trading, Reveals WTM Narayan

Sebi Whole Time Member Ananth Narayan G stated on Friday that the primary goal of the capital markets regulator in limiting derivative trades is to reduce the frenzy on expiry days in options trading. Addressing critiques of the seven-point proposals released earlier this week, Narayan questioned if there was any significant value in the current system and clarified that Sebi does not intend to ban derivatives.

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Speaking at FICCI's annual Capam event, Narayan highlighted the persistent mismatch between the demand and supply of securities over many years. He urged the industry to address this issue. The main regulatory aim now is to specifically curb only the expiry day frenzy in options trading and mitigate systemic risks associated with it.

Focus on Expiry Day Frenzy

Narayan explained that five of the seven proposals in the July 30 consultation paper target this objective. These include limiting the number of weekly option expiries, increasing margins around expiry day, removing calendar spread benefits on expiry day, monitoring intraday positions, and rationalising options strikes.

He noted that as a regulator, Sebi is aware of the need to avoid unnecessary restrictions. However, he stressed that it is challenging to see any significant value in the frenzied trading of options nearing expiry. He described how over 90% of trading volume in index options occurs on expiry day, with a significant concentration in the last hour.

Comparing Trading to Gambling

Narayan likened trading in index options close to expiry to a slot machine in a casino, where individuals hope for a big win. He clarified that not all F&O trading resembles gambling, but it is specifically the final hours ahead of expiry that concern Sebi.

Using data from NSE, Narayan revealed that over 92 lakh individuals collectively lost Rs 51,869 crores during FY24 in index derivatives, excluding transaction costs. He added that 99% of these individuals traded in index options.

Concerns Over Hyperactivity

This hyperactivity in index options on expiry day offers little benefit while raising several issues. Narayan stated that attributing any constructive support for market-wide price discovery, hedging, or capital formation from this activity requires extreme imagination.

He also warned about potential impacts if a black swan event occurred just before expiry. Such an event could significantly affect the overall market ecosystem. Sebi will continue to monitor F&O market activities and consider new measures as needed.

Capital Formation Argument

Narayan pointed out that the net trading loss borne by individuals in FY24 in index derivatives is nearly a third of the net inflows into Growth and Equity-oriented mutual fund schemes during the fiscal year. He lamented the mismatch between demand for securities and their supply.

He noted that Rs 3.1 lakh crore of net demand for paper brought by mutual funds, domestic institutional investors, and individuals into the secondary market annually over the past three years far exceeds roughly Rs 2 lakh crore of annual primary market issuances across various routes.

Narayan called on issuers, including FICCI members, to seize opportunities by raising risk capital from willing investors. This would help create new businesses and household savings, ensuring sustained capital formation as a virtuous cycle.

The capital markets regulator will keep monitoring F&O market activities and consider fresh steps as necessary through a consultative approach.