The much-talked-about SEBI report on F&O trading uncovers some very interesting data!
During FY22-FY24, 1.13 crore unique individual traders incurred a combined net loss of INR 1.81 lakh crore. The per trader loss was almost averaging INR 2 lakh!
While the 33-page report has multiple exhibits carrying tables, charts and data, one particular table that I couldn’t scroll past showcases the nearly DOUBLING of individual F&O traders from about 51 lakhs in FY22 to approximately 96 lakhs in FY24.
Two things are very evident here –
- The number of F&O traders is increasing
- Losses per trader are increasing
In essence, individual F&O traders persistently incur losses but continue to trade, expecting that their fortunes will soon reverse.
For me, this is a very concerning trend. So, I decided to do a deep dive into F&O trading to shed some light on –
- How does F&O trading work?
- The rise of retail F&O trading in India
- Why retail traders are losing money
- Proprietary traders and FPIs: Why they’re winning
Let’s dive in!
What is F&O trading?
Futures and Options are financial derivatives that allow traders to speculate on the future price of an asset without owning it. The key difference between the two lies in the obligations they impose on the buyer and seller. Let’s quickly understand what that means:
What Are Futures?
Futures contracts are agreements to buy or sell an asset at a predetermined price on a specified future date. These are binding agreements wherein the seller is obligated to fulfil the contract terms.
In India, futures are commonly traded on commodities, indices like the Nifty 50, and stocks.
Here’s how it works:
- Leverage: Traders can control a large position with a relatively small amount of capital, also known as margin. For example, with 10x leverage, you only need INR 10,000 to trade INR 1,00,000 worth of an asset. While this amplifies gains, it also magnifies losses.
- Settlement: At the contract’s expiration, the buyer must purchase the asset, and the seller must deliver it. However, in most cases, contracts are cash-settled, meaning they don’t involve the physical exchange of assets.
What are Options?
Options provide the right, but not the obligation, to buy or sell an asset at a predetermined price before the contract expires. This feature makes them more flexible than futures.
The two key types of options are:
- Call options: Give the buyer the right to purchase the asset
- Put options: Give the buyer the right to sell the asset
Source: Dezerv internal research
Unlike futures, options buyers can choose not to exercise the contract if it’s not profitable, but they lose the premium paid for the option.
How F&O trading differs from stock trading
Now that we understand the basics, let’s delve into some key concepts –
- Leverage: Risk and reward multiplied
Leverage is one of the main attractions in F&O trading, but it’s also where most retail traders get burned. Leverage allows you to control a large position with a small investment, but as your exposure increases, so does the risk. A 1% adverse movement in the market can wipe out your entire margin.
91.1% of retail traders incurred losses in F&O trading during FY24. This stark reality reflects how leverage can be a double-edged sword. - Hedging: A safe haven?
F&O trading isn’t just about speculation; it’s a powerful tool for hedging. Businesses and investors use futures and options contracts to protect themselves against price fluctuations. For instance, if an airline anticipates a rise in fuel prices, it can enter into futures contracts to lock in current prices, thus reducing its risk. - Speculation: The high-stakes game
Speculation is where the excitement—and the risk—truly lie. Retail traders enter F&O markets hoping to profit from short-term price movements. However, many fail to understand that this market is dominated by seasoned institutional traders and algo-driven strategies. SEBI’s report shows that only 7.2% of retail traders made profits over the past three years, underscoring the risk involved in speculative trading.
The rise of retail F&O trading in India: A few trends
F&O trading has experienced explosive growth in India, largely driven by the retail segment. This boom has been facilitated by technological advancements, easy access to trading platforms, and social media influencers touting success stories.
The new demographics
- Beyond Top 30 (B30) cities: In FY24, over 72% of retail F&O traders hailed from B30 cities, a sharp rise from previous years.
- Youth-driven market: The proportion of young traders (having age less than 30 years) trading in F&O has increased significantly from 31% in FY23 to 43% in FY24. Nearly 93% of these young traders incurred losses in F&O in FY24.
- Low-income participation: Over 76% of individual F&O traders (65.4 lakh traders) in FY24 had declared an annual income of less than INR 5 lakh.
The proportion of traders having annual income less INR 5 lakh has increased significantly from 71% in FY22 to 76% in FY24.
- New traders: Almost half of all the F&O traders in FY24 (42 lakh traders) were “new traders” (traders who traded for the first time in three years in the equity F&O segment). 92.1% of these “new traders” experienced losses and on an average, experienced a net loss of about INR 46,000 per person in FY24.
These trends are very concerning and shed light on the fact that literacy around the risks of F&O trading needs to increase.
F&O trading statistics: An eye opener
Before we dive into the details, let’s look at some eye-opening statistics:
- In FY24, a staggering 91.1% of individuals incurred net losses in F&O trading.
- Even before factoring in transaction costs, 85.1% of traders saw their positions end in the red during FY24.
- Only 1% of individual traders managed to earn profits exceeding INR 1 lakh, after adjusting for transaction costs.
These numbers paint a sobering picture of the F&O market. But why is this happening? Let’s explore.
The cold truth: Why retail traders are losing money
- Transaction costs:
Transaction costs play a critical role in eroding the profits (and worsening the losses) of retail traders. On average, retail traders spent INR 26,000 per person on transaction costs in FY24 alone. This figure includes brokerage fees, GST, exchange fees, and stamp duty. In fact, SEBI’s study revealed that INR 50,000 crore in transaction costs were incurred by individual traders over the past three years.
A breakdown of these costs shows that brokerage fees accounted for 51% of all transaction costs, with exchange fees and taxes making up the rest. For many traders, especially those making frequent trades, these costs can eat into potential profits. - Behavioural aspects:
One of the most fascinating aspects of SEBI’s report is the persistence of loss-making traders. Despite incurring significant losses year after year, over 75% of traders continued trading even after losing money in consecutive years.
This phenomenon can be attributed to a variety of factors:
- Overconfidence: Many traders believe they can “make back” their losses by continuing to trade, hoping for that one big win that will turn everything around.
- Anchoring bias: Traders often cling to their initial investment or a particular price point, making it difficult for them to cut losses or exit unprofitable positions.
- Social validation: With the rise of social media, many traders are influenced by success stories and public forums that exaggerate the ease of making money in F&O trading.
This behavioural bias leads to a cycle where traders keep increasing their exposure, only to lose more.
Prop traders and FPIs: Why they’re winning
While individual traders are struggling and incurred losses of over INR 61,000 crore in FY24 (before accounting for transaction costs), proprietary traders (prop traders or trading members, who themselves trade in F&O in their own account) and foreign portfolio investors (FPIs) are reaping the benefits. In FY24, prop traders made INR 33,000 crore in gross profits, while FPIs earned INR 28,000 crore.
So, what sets these institutional players apart?
- Algorithmic trading: A significant portion of profits for both prop traders and FPIs is derived from algorithmic trading strategies. 96% of prop traders’ profits came from algo-driven trading, compared to just 13% of retail traders who engage in such sophisticated methods.
- Lower costs: Institutional players benefit from economies of scale, enabling them to lower their transaction costs significantly. In contrast, retail traders are burdened by high costs relative to their trade volumes.
This asymmetry highlights a critical point: F&O trading is not a level playing field. Institutional traders are armed with better tools, access to large pools of data, and lower transaction costs, all of which give them a distinct edge over individual traders.
Navigating the regulatory landscape
In response to the growing losses among retail traders, SEBI has been actively working on regulatory reforms.
SEBI is pushing for greater transparency in algorithmic trading to ensure that retail traders are aware of the risks they face when competing against institutional algorithms.
In fact, this week, SEBI has released a set of 6 measures to strengthen the F&O framework with the aim of creating a safer environment for smaller traders while ensuring that the market remains efficient.
Some of the objectives of the regulators are –
- To curb speculative trading
- Ensure investors take on appropriate risks
- Protect investors from extreme market fluctuations, particularly during high-volume trading sessions.
- Discourage excessive intraday leverage among investors and ensure that they have sufficient collateral to cover their positions.
In summary:
While F&O trading can offer significant returns, the risks are high—particularly for retail traders.
The data is clear: 91% of retail traders lost money in FY24, and the cumulative losses over the past three years have been staggering. The rising popularity of F&O trading among young, low-income traders, many from smaller towns, highlights a growing trend but also a dangerous one. Without proper education, risk management, and strategic thinking, many will continue to fall into the same trap. Thankfully, the regulators are doing a brilliant job by continuously monitoring and strengthening the guardrails to protect the interests of investors.
Disclaimer: The information contained herein is for informational purposes and should not be interpreted as soliciting, advertising, or providing any advice. Securities investments are subject to market risks, and there is no assurance or guarantee that the objectives will be achieved.
All data contained in this newsletter is from the SEBI report Analysis of Profits & Losses in the Equity Derivatives Segment (FY22-FY24).