SEBI aims to consistently regulate and enhance market integrity, risk management, and work for the welfare of investors & traders.
Given the recent extreme highs and lows in the F&O markets, SEBI announced that it will release a consultation paper that will propose significant changes.
The aim is to ensure that F&O markets operate efficiently and transparently.
Why Did SEBI Take this Step
In August, the monthly notional value of derivatives traded reached ₹10.92 lakh crore ($130.13 trillion), making it the highest in the world. The majority of this trading involved options contracts tied to stock indices such as the BSE Sensex and NSE Nifty 50.
Over 93% of 1 crore retail traders incurred losses of over 2 lakhs per person in Equity F&O in the last three years. Only 1% of individual traders achieved profits surpassing ₹1 lakh when accounting for transaction costs.
What Has Happened So Far
SEBI has shifted its focus to regulating the risk taken by individuals in addition to market reforms to achieve a better balance. SEBI previously revised their guidelines for stocks in the F&O, and they are as follows:
- A stricter eligibility criteria was introduced for stocks entering the F&O markets. Only high-quality stocks with strong market depth will remain in this segment, minimizing the risks of market manipulation and excessive volatility.
- The stock’s Median Quarter Sigma Order Size (MQSOS) is an important metric used to gauge the average order size in the market. The entry threshold for the MQSOS has been increased from ₹25 lakhs to ₹75 lakhs.
- The Market-Wide Position Limit (MWPL) is the maximum number of contracts a trader can hold across all exchanges for a specific commodity or financial instrument. The MWPL has been increased from ₹500 crore to ₹1,500 crore.
- Average Daily Delivery Value (ADDV) measures the average monetary value of goods delivered daily over a specified period, often used in logistics and supply chain analysis. The Average Daily Delivery Value in the cash market has surged from ₹10 crore to ₹35 crore.
Stocks that fail to meet the above criteria 3 FYs in a row will be removed from the F&O segment and no new contacts will be issued for them and won’t be eligible for re-inclusion for one year.
SEBI Consultation Paper 2024 for F&O Segment
Let’s see SEBI’s new rules for F&O trading in its latest consultation paper:
- According to a Reuters report, the minimum trading amount is set to increase from ₹5 lakhs to approximately ₹15 lakhs to ₹20 lakhs, as suggested in the July consultation paper.
- Exchanges will have to reduce the number of contract expiries to one per week, down from multiple expiries, which currently allow traders more opportunities to speculate.
High Risk, High Reward: What Does This Mean For You?
The Futures and Options (F&O) segment is often viewed as a double-edged sword, as it has both significant opportunities and considerable risks. Here’s what you need to remember when trading in the F&O markets:
- Get a deeper understanding of the market: The speculative nature of this segment demands a deep understanding of market dynamics and a strong risk management strategy.
- Build emotional resilience: The thrill of potential high profits can lead to impulsive decisions, and prolonged dismay after losses can lead to missed opportunities.
- Ensure risk management: Given the high-risk nature of the segment, risk management strategies such as stop-loss orders, diversification, and position sizing can help mitigate potential losses.
- Do not lose sight of the overall goal: Ensure that trading decisions align with your overall financial goals, and make informed decisions.
Cut your losses, stop overtrading and manage trading risks effectively on Dhan
Read what is Trader’s Control in detail here.
Conclusion
SEBI’s steps to mitigate market volatility and losses are steps towards the overall well-being of investors and traders.
F&O trading should be performed with a strong understanding of market mechanics and risk management to earn substantial rewards and prevent unwarranted losses.
Staying updated with market updates is also key to trading, investing, and analyzing better. See what people who are #MadeForTrade are saying.
