SEBI’s Crackdown on Retail Frenzy: Will it Curb the ‘Bull Run’ in the F&O Market?

Abstract

The Indian derivatives market has witnessed a substantial increase in retail investor
participation in recent times. The amalgamation of an inquisitive youth population,
increasing financial awareness, popularity of online investing platforms and desperation for financial security via a short-cut approach have influenced derivative trading among retail investors in India. The market's euphoria caused the dynamics to fluctuate, making it a fertile environment for speculative gaming. This phenomena has become a matter for contemplation for the market regulator, SEBI which has been grappling with the hyperactivity in F&O trading, as it has found out a potential bubble in this bull-run market.

 

This paper analyzes the factors driving the growth of the derivatives market, including the proliferation of weekly options, the role of finfluencers, and the bandwagon effect. This study also comprehensively analyses the potential impact of newly bought SEBI's regulatory changes on market participants, including retail investors, brokerages, and exchanges. While these measures aim to curb speculative trading and promote market integrity, they may also have unintended consequences for retail investors.

This paper argues that a more effective approach would be to focus on investor education
and awareness along with certain proposed regulations while critiquing the others. By
providing comprehensive training on derivatives trading and risk management, SEBI can
empower retail investors to make informed decisions. Additionally, implementing a phased approach to derivatives trading, with restrictions for new investors, could help prevent impulsive and speculative behaviour.

 

Authors believe that ultimately a balanced regulatory framework will be essential to ensure the growth and sustainability of the Indian derivatives market while safeguarding the interests of investors.​