Recent data on trading volumes in the equity cash and derivatives segment of the stock market indicate that the speculative fervour witnessed in the first half of 2024 has cooled considerably. The benchmark Nifty 50 stands 10 per cent lower from its June 2024 peak. Besides this factor, the regulatory tightening last year to check rampant speculation in the equity market seems to have brought about a decline in trading turnover. Large discount brokers have been complaining about the hit to their revenue. However, the regulator should not pay heed. The measures seem to have had the desired effect of weaning some individual investors away from stock trading.

For some time now, the market regulator has been concerned about the surge in the number of individuals trading in stock market. The work-from-home culture since the pandemic has increased the number of active traders in stock market by 500 per cent since 2019. Studies done by the Securities and Exchange Board of India (SEBI) have shown that 90 per cent of individual traders in the equity futures and options segment and 70 per cent of these traders in the cash segment are making losses. Total losses of individual traders in F&O segment were more than ₹1.8 lakh crore between FY22 and FY24.

To protect these individual investors, the regulator took a series of measures last year. The most important change was the increase in contract size for index derivative contract from ₹5-₹10 lakh to ₹15-₹20 lakh. This move increased the capital required for trading, thereby reducing the turnover in these contracts. SEBI also figured out that speculation occurred most on the expiry day in weekly index options. Therefore, exchanges were told to offer only one weekly option contract. While NSE curtailed its weekly option offering to Nifty 50, BSE limited weekly options to Sensex 30. Other weekly option contracts on Bank Nifty, Nifty midcap, Nifty financial services, Sensex 50 and bankex have been discontinued, thus curtailing trading avenues for investors. Brokers were also told to stop paying referral incentives to clients and the exchange fee went up for investors.

The measures seem to have worked. Premium turnover for index options on the NSE, which witnesses bulk of the trading activity, is down 35 per cent since June 2024. Overall volume in the equity derivative segment is down 32 per cent between June and December 2024. Number of index option contracts traded have halved between October and December 2024. Average daily turnover in the cash segment of the NSE is also down 30 per cent from the peak of ₹1.5 lakh crore in June 2024 to ₹1.04 lakh crore in December, implying that overall trading activity is coming down. Stock exchanges and brokers are going to see a reduction in their revenues over last year. But the regulator should stay the course and continue to take steps to protect individual investors. Investor awareness needs to be increased to warn investors about the pitfalls of F&O trading.