(HT)
The market regulator is keeping a close watch on the options market and may tighten rules for retail investors further, if required, as their participation remains high despite last year’s curbs. Alongside, the Securities and Exchange Board of India (Sebi) may drop a February proposal to monitor position limits for index options through the day, besides increasing position limits significantly in potential relief for high-frequency traders (HFTs), two people aware of the matter said.
The regulator may also look to modify the market-wide position limit (MWPL) across exchanges and link it to delivery volumes of stocks to prevent manipulation and cornering of stocks by any entity, the people cited above said on the condition of anonymity. MWPL refers to the total number of stock options and futures contracts one can trade across exchanges.
A key area of concern for the regulator is the level of retail activity in options that remains high, despite two sets of proposals in October and February.
“Sebi will continue to monitor this segment closely and re-examine the trading activity of individual investors in index options as India continued to record the highest level of trading activity in index options globally, when compared to the size of its cash equity market,” one of the two people cited above said.
In October, Sebi raised the lot size of index options to 75 shares from 25, and allowed only one weekly index options expiry per exchange to guard individuals who were losing heavily in the options market. A Sebi study had found that individuals lost a ₹1.89 lakh crore in FY22-24 due to excess speculation on options expiry day, while HFTs gained.
In February, it proposed imposing a gross limit on index options to ensure that HFTs didn’t take disproportionately large positions. Some of these proposals were relaxed later after receiving feedback from market participants. Besides a proposal to change the calculation of an option’s open position to accurately and transparently portray the market risk, Sebi also proposed a gross limit of ₹1,500 crore to be monitored on an intra-day basis.
However, this faced much opposition from market participants. The regulator has now decided to raise the gross limit to ₹10,000 crore from ₹1,500 crore and the net limit to ₹1500 crore from ₹500 crore, with no intraday limit for index options. By the end of the day, the client must adhere to the ₹1,500 crore net limit and not exceed the ₹10,000 crore gross limit.
“This is a major relief from the earlier proposal which would have resulted in impact costs rising and thus liquidity being drained from the market,” a broker said on the condition of anonymity, as the measures are yet to be announced. “A major pain point has been removed.”
However, some trace the rise in options trading to a 2019 Sebi move.
According to a broking industry official who spoke on the condition of anonymity, Sebi had mandated brokers to collect upfront margins from clients trading intraday in the cash market. This margin—20%—was earlier paid by brokers on behalf of clients, helping them leverage without making any margin payments of their own.
