Sebi study reveals harsh truths of derivatives trading

In an important analysis done by the capital markets regulator Securities and Exchange Board of India (Sebi), it has been found that while the number of individual traders in the equity derivatives segment registered an exponential rise between FY19 and FY22, a vast majority of the individuals experienced losses.

This assumes significance as the findings have once again corroborated what the Indian market watchdog has been saying for long that derivative is a risky instrument for retail investors especially those who are not fully aware of the risks of the instrument.

According to the Sebi analysis, the number of individual traders in the equity F&O segment jumped 500 per cent in FY22, when compared to the number in FY19 - up from 7.1 lakh in FY19 to 45.2 lakh in FY22.

Incidentally, individual traders belonging to age group 30-40 years had the highest
share in participation (39 per cent) across all age groups during FY22.

For younger individual traders (20-30 years), the percentage share of participation went up significantly from 11 per cent during FY19 to 36 per cent during FY22.

More importantly, nine out of 10 individual traders in the equity F&O segment incurred net losses during both the years -- FY19 and FY22 even as 98% of individual traders in the equity F&O segment traded in options during
FY22.

"On average, loss makers registered net trading loss close to ₹50,000 in FY 2021-22. The average absolute net loss of a loss maker was over 15 times the net profit made by a profit maker," stated the Sebi release.

That's not all, however, as over and above the net trading losses incurred, loss makers expended an additional 28 per cent of net trading losses as transaction costs.

Even for those that managed to register some profits, between 15 per cent and 50 per cent of the profits went towards transaction cost.

Based on the findings of the study, the capital markets regulator will shortly issue guidelines for additional risk disclosures required to be made by brokers and exchanges to investors.

The study was based on a sample of all individual clients of the top 10 stockbrokers, accounting for 67 per cent of the overall individual client turnover in the equity F&O segment during FY22.

Also Read: Loss makers of Dalal Street: 9 out of 10 individual F&O traders lost money in FY22, says Sebi