Heads up! One out of 10 F&O traders make losses

A recent analysis by the Securities and Exchange Board of India (Sebi) has shed light on the challenges faced by retail traders in the equity derivatives market. The findings reveal that a staggering 93% of retail traders incurred an average loss of ₹2 lakh each over the past three financial years (FY). The report, which speaks about a troubling trend, indicates that the proportion of individual investors in futures and options (F&O) who recorded losses rose to 91.1% in FY24, up from 89% in FY22.

The implications of these statistics are significant for Sebi's policy-making, particularly concerning the regulation of the F&O segment, where daily turnover frequently overtakes ₹500 trillion. In response to these alarming figures, Sebi has proposed seven key measures aimed at curbing retail participation and speculation in this high-risk market. These measures are expected to be discussed and possibly approved at the upcoming board meeting later this month.

73 lakh individuals suffered losses

Regulatory bodies, including the Reserve Bank of India (RBI), have consistently warned investors about the inherent risks associated with derivatives trading. One of the critical concerns highlighted in the report is that despite consecutive years of losses, over 75% of loss-making traders persist with their F&O activities. In FY24 alone, approximately 73 lakh individual traders suffered losses, with an average net loss of ₹1.2 lakh per person, including transaction costs.

While 99.8% of F&O traders are individual investors, they contributed only 30% of the total turnover in FY24. The average daily turnover has surged to a record high of ₹540 trillion in September, compared to nearly ₹360 trillion the previous year. The rapid increase in retail participation has led to a growing debate over product suitability and the need for additional protections for individual investors.

The demographic of traders is also shifting, with the proportion of traders under 30 rising from 31% in FY23 to 43% in FY24. Nearly three-fourths of these traders are from areas outside the top 30 cities, a stark contrast to mutual fund investors, of whom only 62% hail from similar regions.

Gross profits in FPIs

In stark contrast to the losses experienced by retail traders, foreign portfolio investors (FPIs) and proprietary traders reported gross trading profits of ₹28,000 crore and ₹33,000 crore, respectively, in FY24. Most of these profits were attributed to algorithmic trading, with approximately 97% of FPI profits and 96% of proprietary trader profits generated through sophisticated trading algorithms. This has led to concerns regarding overseas algo traders profiting at the expense of domestic retail investors.

As the number of retail traders nearly doubled from 5.1 million in FY22 to 9.6 million in FY24, the report emphasises the urgent need for investor education and robust risk management practices. A major portion of retail traders continues to face losses, raising questions about their preparedness and understanding of the market dynamics.