MUMBAI: Flagging concerns over the rising volumes in short-term futures & options (F&O) contracts, Sebi whole-time member Ananth Narayan G, who wrote the interim order that banned the US algo trader Jane Street earlier this month, said the regulator is looking at improving the quality of the F&O market "by extending the tenure and maturity of the products and solutions on offer".
"As many experts have pointed out, our derivative market ecosystem is quite unique, in that on expiry days, comparable turnover in index options are often 350 times or more the turnover in the underlying cash market-–an imbalance that is obviously unhealthy, with several potential adverse consequences," he said in a speech to a CII-organised capital markets meet in Kolkata on Thursday.
Explaining his concerns further, Narayan, who joined Sebi from the private sector, said, "Research has suggested that expiry day option trading increases market volatility and could lead to noise trading that may potentially undermine confidence in price formation. Unlike longer term derivatives, short-term derivative products such as expiry day trading in index options may detract from capital formation.”
He also spoke about the need to deepen the cash equities markets. "We must look for further ways to further deepen our cash equities markets, even as we look to improve the quality of our derivatives market by extending the tenure and maturity of the products and solutions on offer," he said.
Sebi’s own research shows that as much as 91% of individual traders incurred net losses trading in F&O in FY25, with their aggregate losses crossing Rs 1 trillion, up 41% from the losses in FY24 when 93% of them lost their money, according to a previous Sebi study released in last September.
This led to Sebi clamping down on F&O trade by increasing the ticket size and the upfront margins and limiting the index expiries to once a week among others.
"This is a large sum of money that could have otherwise gone towards responsible investing and capital formation," said Narayan.
Clearly indicating that the regulator is uncomfortable with the volume of weekly F&O contracts, he said Sebi is aware of the potential concerns of exchanges, brokers, and other intermediaries, as their revenues depend heavily on the volumes of these weekly contracts. However, he also emphasized the need to reconsider whether such a trend is sustainable.
India is the world’s largest derivatives market with 65% of the global volume, of which as much as 95% is on the NSE only. This was 75% till November last when Sebi implemented many tightening measures following which overall volume has come down by at least 20%.
Narayan also highlighted the steps that Sebi has taken in the past to curb the volume of weekly contracts. On October 1 last year, Sebi issued a circular and tightened the rules—such as limiting weekly expiries to only one benchmark index, increasing lot sizes, mandating upfront collection of premiums, removing margin benefits on expiry day, introducing intraday monitoring of position limits, and increasing margins near contract expiry. These measures came into force from November 20, 2024.
In May 2025, Sebi again announced another set of measures to address the issue of rising equity derivatives volumes. These include tracking future-equivalent open interest, linking the market-wide position limit to cash volumes, allowing position creation for single stocks during the ban period if it reduces risk, intraday monitoring of market-wide position utilization, fixing position limits for index futures and options, and establishing new criteria for derivatives on benchmark indices.
Narayan also called for deepening the cash market, saying, “We must look for further ways to deepen our cash equities markets, even as we strive to improve the quality of our derivatives market by extending the tenure and maturity of the products and solutions on offer.”
On the widening of the market, he said the number of demat account holders has more than tripled over the past five years to over 10 crores today. Over the past six years, retail investors have poured in Rs 18 trillion ($210 billion) into equity risk-oriented mutual fund schemes, including hybrid funds. The AUM of such equity risk-oriented funds has risen by well over four times, from Rs 12 trillion in June 2019 to Rs 53 trillion now. Nearly half of all MF folios are from beyond the top 30 cities.
Even as domestic flows into equity markets have dwarfed flows from foreign portfolio investors in recent years, FPIs remain a crucial and welcome stakeholder. As of end June, FPI assets under custody in India's equity markets stood at over Rs 74 trillion (over $860 billion).