India's financial market regulator Sebi has been worried about the speculative activities happening in the derivatives segment, which go against the purpose for which those asset categories were introduced.
As per definition, derivative trading is a complex financial practice that involves buying and selling contracts, called derivatives, that derive their value from an underlying asset. The underlying asset can be anything from stocks, bonds, commodities, currencies, indices, exchange rates, or even interest rates.
On Tuesday, Sebi floated a consultation paper, proposing several additional norms, on the pretext that they would help reduce speculative trading and, in turn, would bring about market stability.
Brokerages see these proposed norms by the regulator as instruments designed to improve market stability and, as well, give protection to retail individual investors.
Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited, notes that Sebi's proposed measures to address the retail frenzy in futures and options (F&O) markets are designed to improve market stability.
"By reducing trading volumes in the F&O segment, these measures aim to decrease both daily and intra-day volatility in the Nifty, which is often heightened due to frequent expirations. This volatility is exacerbated by the large weights of certain stocks," Azeez said.
With these proposed changes once implemented, Azeez believes market participants can anticipate a more stable and orderly market environment, benefiting both retail and institutional investors.
"Overall, these changes are anticipated to promote a healthier trading environment and support sustainable growth in the derivatives market. In the age of advanced algorithms and evolving AI technologies, institutions and large traders often have a significant edge over retail traders. While these measures might be seen as a tough adjustment, they are necessary for long-term stability and fairness in the market," Azeez notes.
Derivatives market assist in better price discovery, help improve market liquidity and allow investors to manage their risks better. However, bursts of speculative hyperactivity in derivative markets, particularly by individual players, can detract from sustained capital formation by endangering both investor protection and market stability.
The Sebi consultation paper, floated on Tuesday, seeks to introduce measures to enhance investor protection and promote market stability in derivative markets, while ensuring sustained capital formation.
According to VK Vijayakumar, Chief Investment Strategist, Geojit Financial Services, Sebi's "crackdown" on futures and options trading is eminently desirable and can go a long way towards making the ongoing rally healthy and less speculative.
"The irrational exuberance of the retail investors, particularly the newbies who entered the market after the Covid crash, will do more harm than good to the overall market in the long run. Therefore, these regulatory measures are to be welcomed," said Vijayakumar.
Jaykrishna Gandhi, Head Business Development - Institutional Equities, Emkay Global Financial Services, though, did not say anything specific about the consultation but noted that “Indian markets have remained resilient despite of various actions coming in on taxation in the budget and Sebi's effort to reduce the speculative trading in the derivatives segment.”
Gandhi believes that the current movement in the Indian stock market is governed by quarterly results and guidance on the growth outlook. (ANI)
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