Recently the NSE placed an advertisement in a business daily warning retail investors about the risk of trading in derivatives, especially options, without relevant trading experience.
The Securities and Exchange Board of India (SEBI) is considering ways to prevent retail traders from punting in the derivatives segment. In order to curb excessive trading and speculation, the regulator may mandate risk profiling and income disclosures of investors among other things says a report citing unnamed sources.
Why is SEBI trying to be so strict?
Because of the NSE’s data for FY21, shows that nearly 90 lakh new investors have joined the trading platform out of which more than half are located outside India’s top 50 most populated cities. Hence an assumption is that this set of new traders may not be aware of the risks associated with trading in the derivatives segment.
For example, in the F&O trade on Wednesday, a 16000 Put option of 14th July (weekly expiry) moved from a low of Rs 30 to a high of Rs 105. Generally, a movement like this will take more than 1 year in a high-performing stock in the cash segment (equity market). This sharp intraday movement is where the retail trader is interested in trading for a larger (oversized position) only because he/she feels one or two wins and he/she is hooked for life. SEBI’s intention is to prevent and curb these kinds of trades among retail investors since it is almost like gambling.
SEBI feels that traders are losing in the options market because they are not aware of the dynamics of the market. In short and simple words SEBI’s main concern is that retail investors might be losing money trading in an instrument they have little or no idea about.
So what’s next?
SEBI is considering two options
— banning certain types of F&O strategies
or
— mandating a stricter risk profiling of clients from brokers.
Please note: Making clients aware of the risk is one thing and banning them completely is taking risk control many notches higher.
SEBI has time and again played its part in protecting retail investors — for example, by asking companies to be transparent, as in the case of IPOs, especially of startups. But, over a period of time History is a witness that prohibition has never worked. Be it alcohol, cigarettes, or trading, restrictions and prohibition have only moved the business underground (illegal).
A series of restrictions imposed over the years like removing leveraged positions in the derivative segment, increasing margins, and raising costs and taxes have resulted in illegal trades called Dabba trades because investors can be like/similar to smokers, who will ignore the warning pictures on the pack and look for instant gratification. (Just as an example nothing personal)
Thought-provoking Feedback
Various brokers and experienced traders and industry experts have suggested that:
- SEBI needs to understand that its role is that of regulating the market and not restricting the entry of players based on their economic status. This would be similar to the film industry restricting actors from small towns to try their luck in the big film industry.
- Few experts have even mentioned that SEBI’s heart is in the right place, but it is shifting its role from that of a regulator to that of a mother hen.
- The industry experts are worried that Denied an opportunity to trade in the regular market, these retail traders may shift to the unethical Dabba market or be part of a collective trading scheme where an ‘eligible’ trader will punch orders on behalf of smaller traders for a fee/profit sharing.
- Few experts have suggested that at best SEBI can ask participants, especially those it is trying to protect from trading in the derivative segment to clear the derivative certification course, the same way it does for dealers working with stockbrokers, or make them attend a compulsory educational seminar conducted by the exchanges or its affiliates.
The market is full of rags to riches stories, and vice versa too. Risk control is where SEBI should focus rather than risk profiling. Conclusion: More than 50% of retail investors who open their Demat accounts these days start with Options Trading since the capital required is lesser compared to Equity cash and Futures.
As discussed above retail traders treat this as Fun, and close to horse betting or Gambling, etc. and play with their hard-earned money. Eventually, they make heavy losses and then turn back to the basics which they should have applied at the start which is LEARNING without any shortcut (example of the shortcut “EARNING” without “L” ) J2k (Justified to Know) because you can Save your time and read the below to be a better Trader than yesterday that went. Don’t try to make money quickly. The stock market IS NOT a place for gambling. The stock market IS NOT a quick money-making scheme. People who are looking to get rich quickly buy F&O options-type lotteries. But they forget most people don’t win lotteries.
So as millennial traders few of the key learning from this caution (article) can be as followed A) You need to identify what is your trading style. – Is it based on indicators? – it is based on an oscillator? – Is it based on price action with chart patterns? – Is it based on Decoding the data for advanced trading? – Are you going to trade breakouts or pullbacks? B) Learn to completely accept the risks associated with trading: So that you will not be surprised if your trade ends up being a loser. Take the small losses and move ON to the next trade. C) Execute your trading setups without any hesitation: Once you identified your style and know what is your maximum risks, do not hesitate to trade your setup.
Start with the basic equity segment and keep a proper record of your trades like a journal till you are comfortable to trade, for example, just like car /automobile driving first get the Learners license and then upgrade. D) Continuously monitor yourself with the help of a Journal. If you find you are making errors try to identify them and rectify them: Because you are your own boss. Therefore, the skill necessary for trading successfully is not just in recognizing a trade, but in developing and embracing beliefs about what to expect from the uncertain environment that defines the nature of the stock market.
