Retail Investors' Derivatives Trading Driven by 'Gambling Instincts': Eco Survey

New Delhi, Jul 22 (PTI) The increase in retail investor participation in Futures & Options (F&O) trading is likely driven by humans' gambling instincts, according to the Economic Survey 2023-24.

Flagging concerns over rising interest in derivative trading, the survey said speculative trade has no place in a developing country.

"Derivatives trading holds the potential for outsized gains. Thus, it caters to humans' gambling instincts and can augment income if profitable. These considerations are likely driving active retail participation in derivatives trading," the Economic Survey 2023-24 tabled in Parliament on Monday.

Recently, Sebi chief Madhabi Puri Buch also cautioned investors against heavy bets on F&O. Before that, Finance Minister Nirmala Sitharaman and chief economic adviser V Anantha Nageswaran flagged the growing risk of F&O trading for retail investors.

"Market practices that take their cues from the thinly disguised leveraged bets masquerading as financial innovations in the developed world have no place in a developing country with a low per-capita income," the survey noted.

The survey warned investors against any potential correction in the stock market, which could make investors feel cheated.

"A significant stock correction could see losses that are more considerable for retail investors participating in capital markets through derivatives. Investors' behavioural response would be to feel 'cheated' by unseen more considerable forces. They may not return to capital markets for a long time. That is a loss to them and the economy," the survey noted.

F&O trading continues to grow in popularity, and market experts believe that this is driven by the potential for profit and the rising trading volumes.

The segment's popularity is evident from its massive growth, with the monthly turnover in the F&O segment reaching Rs 8,740 trillion in March 2024, compared to Rs 217 lakh crore in March 2019.

At the same time, the average daily turnover in the equity cash segment was Rs 1 lakh crore, while the F&O segment saw an average daily turnover of about Rs 330 lakh crore.

Futures and Options trading involves contracts that derive their value from an underlying asset, such as stocks or commodities. Futures contracts obligate the buyer and seller to transact at a predetermined future date and price, while options give the holder the right, but not the obligation, to buy or sell the asset at a set price within a specific period.

These financial instruments are used for hedging risks, speculating on price movements, and arbitraging price differences. However, they come with significant risks, including leverage risk and market volatility, which can lead to substantial losses.

Futures and Options trading is largely being utilised as a speculative tool for quick profits in the stock market. However, the reality is that most retail investors are losing money.

A study by the Securities and Exchange Board of India (Sebi) revealed that 89 per cent of individual traders in the equity F&O segment suffered losses, with average losses of Rs 1.1 lakh in FY22.

Additionally, there was an exponential increase in the F&O segment participation during the pandemic, with the total number of unique individual traders increasing by over 500 per cent from 7.1 lakh in FY19 to 45.24 lakh in FY21, the study noted.

Earlier, Buch stated that the capital markets regulator is "compelled" to warn against speculative bets in the F&O segment because it has become a "macro issue", affecting the broader economy now.

Household financial savings are going into the speculative bets, belying the expectations of being used for capital formation, and the youth is losing tonnes of money in such trades, she stated.

Last month, the Sebi board approved stricter norms for the entry of individual stocks in the derivatives segment. The proposal is aimed at weeding out stocks with consistently low turnover from the F&O segment of the bourses.