Can BSE Benefit at the Cost of NSE as SEBI Plans to Curb F&O Surge?

In a significant move aimed at protecting retail investors, India’s market regulator, the Securities and Exchange Board of India (SEBI), is reportedly considering a proposal to limit weekly expiry to one option contract per exchange. This initiative aims to reduce the participation of retail investors, who often trade with borrowed money, in the highly volatile futures and options (F&O) space.

Potential Boost for BSE

If SEBI’s proposal is implemented, the Bombay Stock Exchange (BSE) could see an unintended benefit at the expense of the National Stock Exchange (NSE), which currently dominates the market. The NSE boasts two very active contracts, Nifty and Bank Nifty, while the BSE has the emerging Sensex contract. Presently, NSE holds an 80-90% market share in the F&O segment, compared to BSE’s 20%.

However, with the proposed restriction of one expiry per week per exchange, BSE might capture a larger market share, potentially up to 50%, not necessarily through competitive means but by regulatory advantage. This shift could significantly alter the current dynamics of the Indian stock market.

Current Market Dynamics

In April 2024, NSE saw trading of 8.4 billion contracts compared to BSE’s 2.2 billion. BSE’s F&O trading only gained momentum in May 2023, highlighting the disparity between the two exchanges. According to the Futures Industry Association, the proposed changes could level the playing field, giving BSE a chance to increase its market presence.

SEBI’s Concerns and Additional Proposals

SEBI, under the leadership of Madhabi Puri Buch, is concerned about the increasing risk exposure of small investors in the current market conditions. One of the proposed changes as reports indicate includes increasing the lot sizes for option contracts from the current Rs 5 lakh to Rs 20 lakh-Rs 30 lakh. This increase aims to deter small investors by requiring them to invest significantly more money, thereby reducing the risk of substantial losses for those with less financial stability.

The SEBI has a problem if a rich guy comes to their window and takes some risk because these HNIs (High Net Worth Individuals) have the belly for the losses. This perspective underscores SEBI’s intention to protect retail investors while allowing more affluent investors to continue participating in the market.

Surge in Retail Investor Participation

The number of retail investors participating in the F&O segment increased by 40% to 9.6 million in FY24. This surge indicates a growing interest in high-risk trading among small investors, raising concerns about the potential financial impact on individuals who may not fully understand the risks involved.

Conclusion

As SEBI contemplates these significant regulatory changes, the Indian stock market could witness a notable shift in dynamics, potentially benefiting BSE at NSE’s expense. By limiting weekly expiry to one option contract per exchange and increasing the lot sizes, SEBI aims to create a safer trading environment for retail investors, ensuring they do not take on more risk than they can handle. The forthcoming decisions by SEBI will be crucial in shaping the future landscape of India’s F&O market.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.