👍👍F&O segment is bleeding retail traders: SEBI study – The Hindu BusinessLine

Clipped from: https://www.thehindubusinessline.com/markets/stock-markets/fo-is-bleeding-indias-retail-traders-sebi-study/article66432664.ece

9 out of 10 individual traders in equity F&Os made net losses in FY19-22

Average net losses stood at ₹50,000 in FY22, which was 15 times higher than those who made average profits.  | Photo Credit: Sitthiphong

The lure of a quick buck is bleeding retail stock market participants dabbling in futures and options (F&O).

A study by market regulator SEBI shows that 9 out of 10 individual traders were making losses in the F&O segment. They made an average loss of ₹1.1 lakh during financial year 2022. As high as 90 per cent of active traders incurred an average loss of ₹1.25 lakh.

India is the world’s largest market for trading in equity F&O, which most experts say is nothing but a form of gambling. Yet, F&O trading has seen a stupendous five-fold growth in less than four years between FY19 and FY22.

According to SEBI, samples from only the top 10 brokers showed that in FY22 there were 45.2 lakh unique individual traders in the F&O segment, up from just 7.1 lakh in FY19. Of this, 88 per cent were active traders, who were making consistent losses. Over 80 per cent of traders in the F&O segment were male.

About 98 per cent of all retail derivative traders were dabbling in the ultra-high risk options segment and 11 per cent in futures in FY22 compared to 89 per cent and 43 per cent, respectively, in FY19.

A new fad

Experts say F&O trading has become a fad due to the mushrooming of discount broking firms that lure traders with fast mobile apps and zero brokerage. In FY22, nearly 35 per cent of the F&O players were in 20- 30 years age group, rising from just 11 per cent in FY19.

Among the active traders (excluding outliers), the average net loss stood at ₹50,000 in FY22, which was 15 times higher than those who made average profits. Only 11 per cent individual traders made an average profit of ₹1.5 lakh. In this, active traders that made an average ₹1.9 lakh at 10 per cent. In this, too, excluding the outliers, 6 per cent of individual traders made an average profit of ₹3,400.

Only the top 1 per cent and 5 per cent active traders who were also profit-makers accounted for nearly 51 per cent and 75 per cent of the profits, respectively, in the retail segment, data showed.

Young traders (under 20) who accounted for 1 per cent share posted the highest average profits among those who made profits. Also, the same age group traders suffered the largest average loss among all the loss makers compared to all other age groups.

In FY22, 89 per cent of the individuals who traded in index options, and 82 per cent in the stock options incurred an average loss of ₹0.77lakh and ₹0.66 lakh, respectively. Among the loss makers, 74 per cent and 67 per cent traders in index and stock futures suffered an average loss of ₹0.96 lakh and ₹2.1 lakh, respectively.

Hedge solution

Deven Choksey, MD, KR Choksey Securities, said: “The data is an eye opener. Curbs on individual F&O traders seem an urgent need. Solution is to push retail traders towards F&O products and funds that operate on hedge mechanism. If retail clients use back-tested F&O software that can hedge positions, then the probability of their making a loss will fall sharply. Funds can design such products, which should be back-tested before being allowed. It will help F&O trading to be conducted in an organised manner.”

Yet, F&O trading has seen a stupendous five-fold growth in less than four years between FY19 and FY22. According to SEBI, samples from only the top 10 brokers revealed that there were 45.2 lakh unique individual traders who participated in F&O trading in FY22 up from just 7.1 lakh in FY19. In this, 88 per cent were active traders, who were making consistent losses. Over 80 per cent of traders in F&O were male participants. About 98 per cent of all the retail derivative traders were dabbling in the ultra-high risk options segment and 11 per cent traders in futures in FY22 as compared to 89 per cent and 43 per cent, respectively during FY19. In this, share of traders in the age group of 20-30 years was over 30 per cent in FY22 compared to 11 per cent in FY19.

Gaining momentum

Experts say F&O trading is a fad that gained momentum due to the mushrooming of discount broking firms that lure traders with fast mobile apps and zero brokerage. Nearly 36 per cent of the F&O players in India during FY22 were in the age group of 20-30 years. Their participation has risen significantly since FY19 when it was just 11 per cent.

Among the active traders (excluding outliers), average net losses stood at ₹50,000 in FY22, which was 15 times higher than those who made average profits. Only 11 per cent individual traders made an average profit of ₹1.5 lakh. In this, active traders that made an average ₹1.9 lakh profit stood at 10 per cent. In this too, excluding the outliers, 6 per cent individual traders made an average profit of nearly ₹3,400. Only the top 1 per cent and 5 per cent active traders who were also profit makers accounted for nearly 51 per cent and 75 per cent of the profits, respectively, in the retail segment, data showed.

Young traders (age group <20 years) that accounted for 1 per cent share witnessed the highest average profits among those who made profits. Also, the same age group traders suffered the largest average loss among all the loss makers compared to all other age groups. During FY22, 89 per cent of the individuals that traded in index options, 82 per cent in the stock options incurred an average loss of ₹0.77 lakh and ₹0.66 lakh, respectively. Among the loss makers 74 per cent and 67 per cent traders in index futures and stock futures suffered an average loss of ₹0.96 lakh and ₹2.1 lakh, respectively.

“The data is an eye opener. Curbs on individual F&O traders seem an urgent need. Solution is to push retail traders towards F&O products and funds that operate on hedge mechanism. If retail clients use backtested F&O softwares that can hedge positions, then the probability of them making a loss will fall sharply. Funds can design such products, which should be backtested before they are allowed. It will help F&O trading to be conducted in an organised manner,” said Deven Choksey, MD, KR Choksey Securities.

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