On August 2, 2024, Ananth Narayan G, whole-time member of the Securities and Exchange Board of India (Sebi), while acknowledging the crucial role of derivative markets in capital formation, said Sebi's only objective is to contain the chaotic surge in index options trading on expiry dates to maintain market stability. Further Narayan said, The demand for securities in the secondary market exceeds the annual primary market issuance, potentially leading to asset price inflation.
Sebi's Regulation on F&O And Larger Market Stability
The proliferation of weekly expiries for index option contracts led to 90% trading volume on the expiry day, with significant concentration in the last hour of trading.
On the chaotic surge in index options trading nearing expiry he said, “If there were an unforeseen black swan global market-moving event minutes before expiry, amidst this frenzied activity and risk-taking, the resultant impact on the overall market ecosystem could be substantial. As a regulator, we are conscious that we must not throw the baby out with the bathwater. When it comes to the frenzied trading in options nearing expiry, however, it is very difficult to see any baby in this bathwater,” Narayan said.
Citing that 9 out of 10 traders make losses he said, "The offsetting gains largely reside with some sophisticated algo-based domestic and foreign high-frequency traders."
The loss borne by individuals during FY24 in index derivatives was as large as one-third of the net inflows into Growth—and equity-oriented schemes of all Mutual Funds during FY24. So, he said, a significant amount that could be put into constructive capital formation is being frittered away at scale.
Supply-Demand Mismatch in Securities & Asset Price Inflation
Narayan said the current mismatch between the demand for securities and the supply of securities is concerning. "The Rs 3.1 lakh crore of net demand for paper brought in by MFs, DIIs and individuals into the secondary market every year the past 3 years, far exceeds the roughly Rs 2 lakh crore of annual primary market issuance spanning IPO, FPO, Preferential Allotment, QIP, Rights Issue, and even OFS," he said. This prolonged mismatch can lead to asset price inflation as witnessed in our small-cap and mid-cap stocks, instead of capital formation. "Issuers must step up, raise risk capital from investors, and create new businesses to ensure sustainable capital formation," he said.
