Retail push catapults derivatives volume to ₹410.7 tn in a day

Rising retail participation on the derivatives segment of the NSE catapulted the total segment turnover to a record high of ₹410.7 trillion on 22 December, more than three times the average daily turnover of ₹131.23 trillion in the fiscal year so far.

The rise was underscored by the number of index options traded spiking to a record 400 million, nearly thrice the daily average of 140 million so far this fiscal year.

“Retail participation in the market has risen across segments, including derivatives, especially options, which have driven derivatives turnover to a single session record high of ₹410.7 trillion,” said Raamdeo Agrawal, chairman, Motilal Oswal. “Demat accounts have grown from 39 million at the end of calendar year 2019 to 106 million by end November 2022.”

Participants become more active when market volatility rises and option activity tends to jump at such times, as they are relatively cheaper than futures. The past week saw the Nifty fall 3% from 18,446 on 16 December through 17,888 on 22 December.

The rising retail interest in options has confounded market veterans, as leveraged products such as these expose retail investors to huge losses while generating modest profits, if any.

Nithin Kamath, co-founder of the country’s largest stock broker Zerodha, said in a recent business update that less than 1% of his firm’s customers who actively trade equity futures and options generate long-term returns higher than bank fixed deposits or 7% annually.

Leverage facilitates exposure to an asset by putting up a fraction of its cost. However, it also results in huge losses, if the bet fails.

“One of the key reasons for the rise in derivatives turnover is a large increase in retail participation, especially on the options segment,” agreed Nilesh Shah, MD, Kotak Mahindra AMC. “However, it’s important to remember that leveraged product losses can be huge so a disciplined and informed approach is imperative,” he warns.

The rise in investor participation is borne out by NSE data which shows market share of this class rising to 28.5% in the current fiscal year through end November from 23% in FY16. Equity derivatives participants mainly include domestic institutional investors, foreign portfolio investors, corporates, retail or individual investors (individual domestic investors, sole proprietorship firms, HUFs and NRIs) and proprietary traders, according to NSE data.