The latest study by the Securities and Exchanged Booard of India found that over 90 percent of individual traders in the equity futures and options segment incurred significant losses, totaling over Rs 1.8 lakh crores in the preceding three years.
Over 75 per cent of these individual F&O traders are from low income category earning less than Rs 5 lakh and despite consecutive years of losses, over 75 per cent of them continue trading in F&O. The number of young traders (under 30 years old) in the F&O segment is on the rise, with a year-on-year increase of 10 percent.
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F&0 Trading Gets Tougher; Chances of Profit Gets Bleak For Individual Traders
Starting from October 1, 2024, F&O trading is going to get pricier due to changes in the Securities Transaction Tax (STT). The STT on option sales will jump from 0.0625 per cent to 0.1 per cent of the premium. This study found that individual traders already spent Rs 26,000 per person on F&O transaction costs in FY24. In the past three years, traders collectively shelled out around Rs 50,000 crore on transaction costs, with 51 per cent going towards brokerage fees and 20 per cent towards exchange fees.
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After adjusting for transaction costs, only 1 per cent of individual traders managed to earn profits exceeding Rs 1 lakh.
High Loss Rates Among Individual Traders
As many as 93 per cent of over 1 crore individual F&O traders incurred average losses of around Rs 2 lakh per trader (inclusive of transaction costs) during the three years from FY22 to FY24.
The top 3.5 percent of loss-makers, approximately 4 lakh traders, faced an average loss of Rs 28 lakh per person over the same period, inclusive of transaction costs. While, individuals lost money in options, they made profits to the tune of about Rs 13,400 crore in Futures.
Who Made Profits?
Proprietary traders and Foreign Portfolio Investors (FPIs) earned profits of Rs 33,000 crore and Rs 28,000 crore, respectively, in FY24 (before accounting for transaction costs). Against this, individuals and others incurred a loss of over Rs 61,000 crore in FY24 (before accounting for transaction costs).
How Did Big Players Make Profits?
Most of the profits were generated by big palayers that used trading algorithms, with 97 per cent of FPI profits and 96 per cent of proprietary trader profits coming from algorithmic trading. Around 90 per cent FPIs and 50 per cent proprietary traders traded through algorithms (commonly known as Algorithmic Trading), the study found.
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Less than 1 per cent of total traders are big players, yet they handle a staggering 70 per cent of the market turnover. On the other hand, individual traders make up the remaining 30 per cent. This means that big players have significant influence over market direction. Individual traders miss the fact that – algorithms used by big players may be able to detect and target the stop loss levels set by individual traders.
It's worth noting that the number of individual investors in F&O has skyrocketed from 55 lakh to 94 lakh, but their turnover is only a fraction of the big players who constitute less than one per cent.
