SEBI's peak margin rules have sparked a lot of controversies lately. The risk management framework introduced by the regulator was aimed at eradicating intraday leverage by way of an upfront collection of margins to trade in equities and F&O. It basically removed brokers' & clearing members' ability to fund clients' trading exposures. The news of this circular spelled disaster for undercapitalized day traders & the intermediaries which include exchanges and brokerages like us. We anticipated our topline to be hit by 30-35% due to this new rule despite being very conservative while offering leverage relative to the industry norms. As it turned out, the influx of a new breed of retail investors helped save the day despite a moderate revenue loss from existing clients. We're all surprised how swiftly retail traders adapted to the new margin rules! Perhaps, it's a sign of great things to come. On the one hand, SEBI managed to reduce the systematic risk from intraday funding activities and on the other, new investors are starting off in a less leveraged environment which is probably good for them in the long run. From a regulatory perspective, the world is much safer for new investors, and here's why

On Volumes:

In the 1st phase of peak margins, volumes were pretty steady as shown here. This table shows the segment-wise data for volume on NSE so far this year until July (Aug data isn't yet published by NSE).  

Total turnover in diff. segments (Rs. Bn) from Jan to July 2021. Source: NSE
Total turnover in diff. segments (Rs. Bn) from Jan to July 2021. Source: NSE

 

Some observations on volumes from January to July:

  1. The cash market was relatively steady but has declined slightly by 9% since Jan.
  2. Index futures showed promise initially but went down by 29% since Jan levels.
  3. Surprisingly stock futures only went down by around 11%.
  4. Index options volumes increased by approx. 16%.
  5. Stock options volumes fell by some 10%.
  6. Currency futures were relatively stable and increased by 10%. 
  7. Currency options, however, have negligible volumes but still went up a lot in % terms. The volume mainly comes from USDINR contracts which account for nearly 72% of the overall Average Daily Turnover. GBP/INR is a distant second. 

 

Let's take a step back & view participation trends by various types of investors:

FY22 data till July 2021. Source: NSE
FY22 data till July 2021. Source: NSE

The share of individual investors by market participation has increased substantially since the covid lockdowns. Many believed that it'll be a short-lived spike. However, the trend has endured despite the unlocking of the economy and a regularized work environment in many parts of the country. It perhaps indicates that we're at the cusp of a new beginning and a significant percentage of young working-class Indians will enter the stock markets in the next few years.

 

Observations on NSE Equity derivatives participation (Premium Turnover):

Participation in Equity Derivatives (Premium Turnover). Source: NSE.
Participation in Equity Derivatives (Premium Turnover). Source: NSE.
  • Proprietary traders' share has increased to approx. 35%.
  • Individual investors' turnover stands at 25%. On July 21 it is 23%.
  • FIIs share of overall derivatives premium turnover is kinda steady.
  • DIIs have regulatory restrictions and only contribute very little <5%.

 

Observations on NSE Equity derivatives participation (Notional Turnover):

Participation in Equity Derivatives (Notional Turnover). Source: NSE.
Participation in Equity Derivatives (Notional Turnover). Source: NSE.
  • Proprietary traders' share is steady at 48%. Had a big dip in FY19 & FY20.
  • Individual investors' turnover stands is very steady at 28%. 
  • FIIs share of overall derivatives notional turnover is only 10%.
  • DIIs have regulatory restrictions and only contribute almost 0%.
  • Corporates are at 7%. Their premium turnover is equivalent & steady. 

Other key facts about retail participation in relative terms:

  1. Retail investors have the highest share in index futures at 39% in FY21. That reduced to around 28% as of July 21 indicating that the interest in the index futures segment is waning. FIIs have about 15-17% share here. Prop traders have over 30% share just as they do in all other segments. 
     
  2. Retail investors have the highest share in stock futures at 25% in FY21. That reduced to around 19% as of July 21 indicating that the interest in the stock futures segment is also fading. The futures segment has taken a toll due to peak margins. FIIs have a 24% share here & prop traders as usual have approx. 30%. Not much has changed for them in terms of market share. 
     
  3. While retail investors are primarily gaining a share in the index options, prop traders dominate the stock options segment with a 50% market share. FIIs share in this segment fell steadily and is now at approx 5%. Retail still has a 30-33% share. Not bad at all. 
     
  4. The volumes on the currency derivatives segment are dominated by prop at around 50% and retail contributes approximately 20-25% on both premium & notional turnover. Bank, FIIs, corporates, and others are a very small percentage of the total. 

Overall, the key takeaway from all these statistics is that despite the sharp increase in margin requirements, retail traders have been able to increase their trading participation through options. There are strong reasons to remain optimistic about the individual investors' resilience. Since the beginning of 2021, we've seen that many of our clients have been increasing their trading capital steadily by funding their accounts on a regular basis to be able to meet the margin requirements or to diversify their trading portfolios. Hoping that SEBI will reverse its decision is a moonshot and quite unlikely to happen in my opinion. Having said all of this, we never know what's in store from 1st Sep onwards. Let's hope that this trend continues to rise. 🤞

Happy Trading!