Mirroring global trends, there has been a sharp increase in retail trading in India’s equity derivatives market, with a majority of individual traders incurring losses. In this post, Aggarwal and Mitra argue that poorly targeted interventions may impose real costs on the broader market without improving outcomes for traders they are meant to protect. They call for more granular analysis and a nuanced policy response.
India’s equity derivatives market has become a major area of policy concern, driven by the sharp rise in retail trading in equity index options. Analysis by SEBI (Securities and Exchange Board of India) indicates that about 91% of individual traders in the equity derivatives market incurred net losses between FY22 and FY24. With these losses increasingly viewed as a potential risk to household savings, curbing retail trading activity has become a key regulatory priority.
In October 2024, SEBI responded by announcing a series of measures. These included raising minimum contract sizes, restricting weekly expiries, and increasing margin requirements. The Union Budget for FY27 also proposed higher Securities Transaction Taxes (STT) on derivatives trades, effective April 2026.
Early evidence on the effectiveness of these measures shows that the share of retail traders reporting losses remained unchanged even after the interventions in FY25. Aggregate retail losses increased by 41%, while average losses per trader rose by 27%
If tighter restrictions do not materially change these outcomes, the policy question is: are current measures addressing the risk appetite and trading behaviour of retail traders, or are they merely changing the market conditions under which traders participate? This question matters because such interventions are not new. Minimum contract sizes were revised upward in 2016, and STT has been raised before, including in 2024. Yet there is little evidence that such measures reduced retail participation or their losses. The issue, then, is whether broad market-wide restrictions are the appropriate response.
The growth of India’s equity derivatives market
Since its introduction in the early 2000s, India’s equity derivatives market has expanded at a remarkable pace, driven overwhelmingly by index options. Their share in total equity derivatives turnover rose from 45% in FY10 to 91.7% in FY21 and 98% in FY24. A key inflection point was the 2008 shift in STT to premium-based calculation, which significantly reduced the tax burden on options trading. Technological developments and product innovations, such as high-frequency trading and weekly expiry options, also contributed.
Two features of this growth are worth noting. First, individual investors’ share of turnover has ranged between 22% and 40% from FY03 to FY25, and was higher between 2004 and 2008 than it is today. High retail participation in this segment is thus not a new phenomenon. Second, derivatives market growth has broadly tracked the cash equity market, with both segments growing at around 23-25% annually between FY20 and FY25.
Evidence on retail losses
Policy concerns stem from high retail losses, but addressing them requires analysis of how those losses are distributed and whether loss-making traders persist.
SEBI’s analysis indicates that participants whose options premium turnover exceeded Rs. 1 crore during FY22 to FY24 accounted for only about 17% of options traders, yet represented more than 93% of turnover and roughly 81% of total losses. By contrast, smaller traders with turnover below Rs. 1 lakh over the same three-year period contributed only 0.6% of aggregate losses, averaging approximately Rs. 3,300 per trader. The middle category of remaining traders is too broad to allow meaningful inference.
On persistence, 76% of loss-makers continued trading despite prior losses. But without a breakdown by turnover size, it is unclear whether they are high-turnover traders or small traders repeatedly making modest bets, a distinction that is critical for intervention design.
Importantly, transaction costs, including brokerage, taxes, and exchange fees, accounted for a substantial 27% of gross losses in FY24, up from 21% in FY22. This suggests that further increases in transaction costs are more likely to deepen retail losses than to deter trading activity.
The implication is clear: retail participation in the derivatives market is highly uneven. A relatively small group of highly active traders accounts for most trading activity and most losses. Higher transaction costs further amplify these losses, while evidence on persistent loss-makers remains too limited to design targeted intervention.
India’s experience is not unique
The surge in retail participation in equity derivatives, especially short-dated options, mirrors a broader global shift that accelerated after March 2020. In the US, the retail share of options trading rose from 23% in January 2020 to nearly 49% by December 2022, with roughly 75% of retail S&P 500 options trades involving zero-days-to-expiration (0DTE) contracts by 2023 (Bogousslavsky and Muravyev 2024).
Retail underperformance in derivatives markets is also well-documented internationally. Studies from the US and South Korea show that retail traders as a class tend to incur significant losses across a range of maturities, not just short-dated contracts. Beckmeyer, Branger and Gayda (2023), for instance, find that retail investors lost an average of US$241,000 per day trading DTE options between February 2021 and September 2023. Bryzgalova, Pavlova and Sikorskaya (2023) estimate aggregate retail options losses of US$2.1 billion between November 2019 and June 2021.
Crucially, retail underperformance is not confined to ultra-short tenors. Nor is it a recent phenomenon. In South Korea’s highly liquid KOSPI 200 options market, where retail participation has historically been high across maturities, Hu et al. (2024) find that the median retail investor lost approximately US$5,000 over the 2010-2014 sample period. Comparable patterns of retail losses have been documented in Dutch and Chinese derivatives markets, as well as in broader US options trading across holding horizons.
The drivers of retail losses are strikingly similar across geographies: overconfidence, poor market timing, concentration in simple directional bets, overpayment relative to realised volatility, and high transaction costs. This suggests retail losses reflect behavioural features common to derivatives trading globally, not a failure unique to India. Broad market-wide interventions may then impose real costs on hedgers, liquidity providers, and institutional participants without improving outcomes for the traders they are meant to protect.
Towards better-targeted regulation
Retail participation in India’s derivatives market merits continued monitoring. However, the relevant policy question is not whether retail traders lose money; they often do, in India as elsewhere.
The more relevant questions are: which traders lose persistently, how much relative to their trading activity, and whether their behaviour resembles repeated speculative trading. These questions require more granular analysis. Without it, interventions risk being poorly targeted, imposing costs on the broader market while leaving the underlying problem unaddressed.
The views expressed in this post are solely those of the authors, and do not necessarily reflect those of the I4I Editorial Board.
Note:
- Weekly expiries refer to options contracts that expire every week rather than monthly. SEBI’s circular restricted weekly expiries to a single benchmark index per exchange: Nifty 50 on the NSE (National Stock Exchange) and Sensex on the BSE (Bombay Stock Exchange), beginning November 2024. Besides, additional margins were implemented on option sellers on expiry days to cover potential risks due to increased volatility.
Further Reading
- Bogousslavsky, V and D Muravyev (2024), ‘Anatomy of retail option trading’, SSRN.
- Bryzgalova, Svetlana, Anna Pavlova and Tatyana Sikorskaya (2023), “Retail trading in options and the rise of the big three wholesalers“, Journal of Finance, 78(6): 3465-3514.
- Hu, Jianfeng, Anzhela Kirilova, Seonghoon Park and Doojin Ryu (2024), “Who profits from trading options?”, Management Science, 70(7): 4742-4761. Available here.
- Securities and Exchange Board of India (2024), ‘Analysis of profit and losses in the equity derivatives segment (FY22–FY24)’, Research Department, Securities and Exchange Board of India.
- Securities and Exchange Board of India (2025), ‘Comparative study of growth in equity derivatives segment vis-à-vis cash market after recent measures’, Research Department, Securities and Exchange Board of India.