The US market has seen meme-driven, casino-like trading in recent years. But on the other side of the world, a boom in stock speculation is brewing, and GameStop and Bitcoin appear to be tame, or at least well-tame.
The US market has seen meme-driven, casino-like trading in recent years. But on the other side of the world, a boom in stock speculation is brewing, and GameStop and Bitcoin appear to be tame, or at least well-tame.
India accounted for a staggering 78% of all equity option contracts traded globally in 2023, according to data from the Futures Industry Association (FIA), a global derivatives market policy advocacy group. Last year, the number of stock index options traded on the market reached 84.3 billion, an increase of 153% compared to 2022. Total futures and options trading volume on the National Stock Exchange on Thursday reached $4.5 trillion in notional value.
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India accounted for a staggering 78% of all equity option contracts traded globally in 2023, according to data from the Futures Industry Association (FIA), a global derivatives market policy advocacy group. Last year, the number of stock index options traded on the market reached 84.3 billion, an increase of 153% compared to 2022. Total futures and options trading volume on the National Stock Exchange on Thursday reached $4.5 trillion in notional value.
A derivatives boom does not necessarily pose immediate systemic risks. But while many brokerages and stock exchanges are raking in cash, individual investors are collectively losing out on large sums of money. As in the US in 2021, a massive bull market combined with new mobile technology that makes trading more accessible and game-like is attracting large numbers of small investors and social media influencers. Protecting the former may require further regulation.
One concern is that almost all of the options traded are short-term, and almost everyone who buys options is losing money. Nine out of 10 individual traders in stock futures and options made losses in the financial year ending March 2022, with an average loss of INR 110,000, according to a report by Securities and Exchange Board, India's securities regulator. rupee, which was on par with the country's average stock price. per capita income. In October 2023, weekly rather than monthly options accounted for 95% of trading volume, according to an Axis Mutual Fund report last year. According to research by Axis, individual traders held options on average for less than 30 minutes.
The other is that the investor base is rapidly expanding, many of whom may be young, inexperienced, and relatively wealth-poor. According to brokerage firm ICICI Direct, the number of active derivatives traders has grown from just 500,000 in 2019 to 4 million by 2023. Also, 36% of retail traders are between 20 and 30 years of age, up from 11% in 2019, according to the SEBI report.
Fear of missing out on the country's long stock market boom is a big factor, especially for people who don't have the assets to directly own many stocks. Indian stocks have been on the rise for eight consecutive years and are poised for modest gains in 2022. Sahaj Agrawal, vice president of derivatives research at Kotak Securities, says novice investors are rushing in because they feel they are late to the “glamorous” trading game.
While most investors may not be doing well, there are some obvious beneficiaries, including brokerages, stock exchanges and the Indian government, which is siphoning off new transaction tax revenue. Stock exchanges have started offering short-duration options amid a pandemic-era trading boom. The Bombay Stock Exchange currently earns almost as much from equity derivatives in terms of transaction fees as it does from the regular spot market. Just a year ago, these revenues were zero.
In addition to publicly warning retail investors about the risks, SEBI has recently taken steps such as tightening margin regulations in early 2023. But so far, it hasn't been enough to curb the speculative fever.
You may need more. Even assuming that these huge trading volumes do not pose systemic risks, the rapid emergence of such a profitable industry for exchanges and brokers makes it a very unprofitable industry for actual investors. That raises an obvious question.
Email Mega Mandavia at megha.mandavia@wsj.com.