High-frequency traders, brokerage firms to face brunt of regulatory curbs on options (updated)

Motilal Oswal Financial Services

31/07/2024 14:41

(Adds impact on high frequency traders, quant funds, updates
share prices)
    By Jayshree  P Upadhyay and Sethuraman N R
       BENGALURU, July 31 (Reuters) - The Indian market
regulator's proposed measures to curb the trading frenzy in
options will impact high-frequency traders and quant funds as
well as brokerage firms that have gained from increased retail
investor interest in the segment, traders said.
    On Tuesday, the Securities and Exchange Board of India
(SEBI) proposed raising the minimum trading amount for index
options by more than three times, reducing the number of
contracts expiring each week and hiking margins.
    The regulator also suggested bringing down the range of
prices at which option owners can buy or sell the underlying
stock, called strikes.
    
    HEDGING VS VOLUMES
    For high-frequency traders and quant funds, which trade in
futures and options, these measures will limit their ability to
hedge, according to Rishi Kohli, chief investment officer for
hedge fund strategies at asset management firm InCred.
    These entities "need some of these products for cheaper
hedging. With reduced expiries, the advantage of the cheaper
hedge will reduce," he told Reuters on Wednesday.
    A lobby body for India's quant funds will send a
representation to the regulator to review some of its proposals,
said two hedge fund managers who declined to be named.
    Stock exchanges and retail-focussed brokerages will also
take a hit to their volumes, according to brokerage Jefferies.  
 
    Investec expects a 30% drop in the number of derivative
orders per client for Angel One and sees the brokerage raising
prices to 25 rupees per order from 20 rupees.
    Earlier in the day, shares of SMC Global Securities
 SMCG.NS  Geojit Financial  GEOJ.NS and IIFL Securities
 IIFS.NS  fell between 1%-5%.
    
    MORE ACTIVITY
    Larger non-individual players such as high-frequency
algorithm-based traders and foreign investors in general made
profits while individual investors incurred losses, SEBI said in
a discussion paper uploaded on its website on Tuesday.
    The options segment has been experiencing more activity as
India's two leading exchanges offer multiple options contracts
each week, leading to such contracts expiring nearly every day
of the week.
    The notional value of index options traded more than doubled
in 2023-24 to $907.09 trillion from $447.69 trillion a year ago,
according to regulatory data.
    Over 9 million individuals and firms dabbled in index
derivatives in fiscal 2024, incurring a loss of 516.89 billion
rupees ($6.18 billion), the SEBI paper added.    
    
    LIMITED IMPACT  
    India's largest discount brokerage Zerodha, however, is not
likely to record a large impact on options trading volumes, its
CEO Nithin Kamath said on social media platform X, as these
changes would "incentivise futures traders to move to options"
due to caps on leverages in futures.
    Also likely to offset the impact is exchange operator BSE
 BSEL.NS , according to Jefferies. The exchange may "even gain
if volumes spill over from discontinued products to those which
are continued," Jefferies said.
    BSE  BSEL.NS  closed 6% higher on Wednesday.     
    
($1 = 83.6980 Indian rupees)

 (Reporting by Sethuraman NR in Bengaluru; Editing by Mrigank
Dhaniwala and Janane Venkatraman)
 ((Sethuraman.NR@thomsonreuters.com; (+91 9945291420); Reuters
Messaging: nallur.sethuraman.thomsonreuters.com@reuters.net))