Equity-linked Exchange Traded Derivative Contracts – The Retail Rush and Regulatory Measures

 

Background

Derivatives are foundational instruments in modern financial markets, created to manage and transfer risk. By allowing participants to take positions on future price movements, derivatives such as futures and options enable efficient price discovery, portfolio hedging, and liquidity management. Globally, Institutional investors have long used these tools for risk control and asset allocation strategies.

In India, the Equity linked Exchange derivatives market has undergone a rapid transformation in recent years. It is now among the world’s largest by volume, thanks in part to a surge in retail participation and also due to the small size of the contracts (as compared to global counterparts). Aided by user-friendly platforms, low entry costs, and real-time digital access, retail investors are also entering the derivatives segment in record numbers, particularly trading Index options contracts. Weekly contracts on headline and sectoral indices like Nifty 50 / Sensex / Bank Nifty / Bankex had become the most actively traded products, often favoured for their affordability and flexibility as also for the high volatility associated with such underlying indices.

This trend marks a significant shift in the participant profile of India’s F&O market, from a space once dominated by Institutions and hedgers to one increasingly populated by retail traders. Understanding this shift is critical to evaluating how the market is evolving, the role derivative contracts now threaten to play in retail portfolios, and what it means for market structure and regulatory oversight going forward.

Overview of SEBI study on Retail Investors

Recognising this shift and its potential consequences, SEBI initiated a series of data-driven studies to assess the financial outcomes for retail participants in the Exchange traded derivatives segment. The first of these studies, released in January 2023, was a watershed moment. Titled “Analysis of Profit and Loss of Individual Traders Dealing in Equity F&O Segment,” the report revealed that a staggering 9 out of 10 retail traders ended up with net losses. This eye-opening data sparked widespread discussion and concern, leading SEBI to initiate a consultative process aimed at strengthening investor safeguards and market discipline.

In July 2025, SEBI published a follow-up study incorporating data from the financial year 2024–25. This is a more detailed and expansive analysis and presents the underlying picture of retail trading patterns. It highlighted not only the growing scale of participation but also the concentration of risk and losses.

Key Findings

Here are some of the key findings of the SEBI report of July 2025:

Massive Retail Losses in Derivatives:

• In FY 2024-25, 91% of individual traders in the Equity Derivatives Segment (EDS) incurred net losses, similar to the previous financial year.
• Net losses of retail traders widened to ₹1.05 lakh crore in FY 2024-25 (up 41% from ₹74,812 crore in FY 2023-24).
• Average loss per trader in FY 2024-25: ₹1.1 lakh (up 27%).
• The details of losses are as follows:

 

Source: SEBI

Weekly Index Options Dominated Retail Activity

• Majority of the retail losses were concentrated in weekly index options contracts (e.g. Nifty 50, Sensex, Bank Nifty and Bankex).
• The number of contracts in these instruments saw exponential volume growth but were largely used speculatively, not for hedging.

 

Participation Trends and Contraction

• Unique retail traders in the Equity Index derivatives segment (EDS) dropped 20% YoY in the December 2024–May 2025 period.
• Despite the decline in the above-mentioned 6-month period, the participation is still 24% higher than what was seen two years ago.
• Traders with low turnover (<₹1 lakh) saw the sharpest decline, yet they represented the largest growth cohort over two years.

 

Derivative Turnover Trends

• Index options (premium terms) grew at a 5-year CAGR of 72%; notional turnover was up 101%.
• In FY 2024-25, average daily traded value in EDS was ₹2.63 lakh crore, while Cash Market was ₹1.2 lakh crore.

 

Source: SEBI

Recent SEBI Measures in Equity Derivatives Segment

In the light of rising retail participation and alarming levels of losses in the Equity derivatives segment, SEBI introduced a series of regulatory measures between late 2024 and mid-2025. These steps aim to curb excessive speculation, enhance risk management, and ensure more informed and sustainable participation by individual investors. Below is the list of some of the key measures taken by SEBI:

• Rationalized weekly Index derivative contracts to reduce speculative expiry-day trading.
• Increased tail risk coverage on expiry days to better manage volatility and systemic risk.
• Raised the minimum contract sizes for Index derivatives to limit over-leveraging by low-capital traders.
• Standardized expiry days across Exchanges to streamline derivative contract lifecycles.
• Mandated upfront collection of Option premiums from buyers to enforce capital discipline.
• Removed calendar spread margin benefits on expiry days to curb misuse of hedging strategies.
• Introduced intraday monitoring of position limits to prevent real-time breaches and ensure compliance throughout the trading session.

 

The Way Forward

As India’s Equity derivatives market expands, the focus must shift toward ensuring responsible and informed participation. SEBI’s recent measures are a step in the right direction. Enhancing financial literacy is the need of the hour. The Exchanges (where such contracts are traded) must come forward and conduct targeted Investor programmes with the aid of Pin-code analysis (to get an idea of the trading pattern across the country). Introduction of risk-profiling before retail access (aligned with international best practices) is also an important step to be considered.  Brokers and Exchanges must promote transparent disclosures and better risk awareness. A dynamic, data-driven regulatory approach should continue to guide market reforms. Striking a balance between Innovation and Investor protection will be key to building a more resilient and inclusive Equity derivatives ecosystem going forward. SEBI must continue to remain committed towards its key functions of ‘protecting the investors of securities and promote the development of and regulating the securities market’.

 

Author: CMA Suresh Narayan, Adjunct Faculty NISM