SEBI’s F&O Curbs Reduce Participation, Not Trading Losses

SEBI’s latest assessment of India’s futures and options (F&O) market reveals a mixed regulatory outcome. While stricter rules have reduced retail participation by nearly 20 per cent, traders who remained active still lost a staggering ₹91,685 crore in FY26. The findings suggest that curbing the number of participants alone cannot eliminate the behavioural and structural risks associated with leveraged options trading, where speculation, overconfidence and frequent trading continue to inflict heavy losses.

A Retail Trading Boom Meets Regulatory Reality

India’s equity derivatives market witnessed an unprecedented surge in recent years, driven by smartphone-based trading apps, low-cost brokerages, social-media investment tips and the promise of quick profits. Millions of first-time investors, including young traders from smaller towns, entered the F&O market.

However, options trading is inherently risky. Leverage amplifies gains and losses, rapid time decay erodes positions, and transaction costs accumulate quickly, making short-term speculative trading especially unforgiving for inexperienced participants.

Participation Falls, But Losses Stay Heavy

SEBI’s study shows that active individual F&O traders declined from 98.1 lakh in FY25 to 78.6 lakh in FY26—the first annual drop since FY16. Aggregate net losses also fell by 18 per cent, from a revised ₹1.12 lakh crore to ₹91,685 crore.

Yet a closer look reveals a worrying trend. The average loss per trader actually increased from around ₹1.14 lakh to nearly ₹1.17 lakh. This indicates that while many casual traders exited the market, those who continued trading often took equally—or even more—aggressive positions.

Options Trading Remains the Biggest Risk

The study highlights the overwhelming dominance of options speculation. Nearly 87.7 per cent of individual traders ended FY26 in losses, while options alone accounted for almost 92 per cent of total retail losses.

Around 97 per cent of traders primarily relied on option-buying strategies, whereas option sellers remained a small minority. Among those who lost money, the average loss stood at roughly ₹1.47 lakh, compared with average gains of about ₹1.22 lakh among profitable traders. The imbalance underscores how repeated speculative betting continues to outweigh occasional success.

How SEBI Tightened the Rules

To address excessive speculation, SEBI introduced a series of reforms from November 2024. These included: -

·       limiting weekly index expiries,

·       increasing minimum contract sizes,

·       requiring upfront collection of option premiums,

·       withdrawing certain margin benefits on expiry days,

·       raising tail-risk margins for short options and

·       strengthening intraday monitoring of position limits.

These measures were designed to make high-frequency speculative trading more expensive and reduce excessive activity during expiry sessions.

Stronger Rules Need Stronger Investor Discipline

SEBI has rightly avoided claiming that the decline in participation resulted solely from its reforms. Market volatility, changing investor sentiment and evolving trading strategies also influenced behaviour. Meanwhile, trading turnover declined only modestly, suggesting that committed traders continued participating actively despite stricter regulations.

The FY26 data points to a broader policy challenge: protecting household savings without weakening the legitimate role of derivatives in hedging and price discovery. Stronger risk disclosures, suitability checks, action against misleading finfluencers advice and deeper investor education may now become as important as regulatory tightening. The lesson is clear—fewer traders do not automatically mean safer markets when leverage and speculative habits remain deeply entrenched.

(With agency inputs)