“Most of the volume occurs in the weekly options market, leading to a sharper price discovery, the flip side of which is an inherent potential for increase in volatility,” the SC panel said after taking in inputs from the Association of Mutual Funds in India.
Since institutional investors such as mutual funds, insurance companies and pension funds use the derivative segment purely for hedging and mainly deal in the cash segment, an element of volatility is inherent in the derivatives market due to a lack of depth in institutional participation, it noted.
“It was found that four of the larger Adani Group companies are in the F&O segment. They were observed to have middle-of-the-range volatility as well as impact cost. This is despite the observation that floating stock is low in these companies on account of promoter holding being high at around 57-73%,” the report said.
Trading in the options segment of the exchanges has touched a record high in the past two years amid an uptick in margins in the futures segment, increased activity from algo traders, a weekly expiry cycle and the entry of new traders in the aftermath of the Covid-19 pandemic.
A recent study by the Securities and Exchange Board of India showed that the number of individual traders in the equity F&O segment rose 500% in three years to 4.5 million at the end of FY22. What’s more, 90% of individual traders in this segment incurred net losses.
The SC panel noted that investors need to be made aware of heightened surveillance on stocks by way of additional surveillance measures or graded surveillance measures.
“The stock trading is almost entirely digital even at the consumer’s end and it should be possible to make relevant an d pertinent information available at the point of transaction. Zerodha and Paytm Money are said to have implemented measures to alert clients about stocks being on ASM or GSM at the point of entry of orders. This should become the norm rather than represent exceptions,” the SC panel said.