While some people were surprised by this, no one who closely observed the equity markets found this to be unexpected. It is a known fact that almost all individual traders make heavy losses in F&O, but it’s important that the Sebi study has put a number to it. In fact, at that time, I observed that if the traders had been tracked for a longer period, the aggregate number would have been higher.
Now, Sebi has released a follow-up report based on data from three financial years: 2021-2022, 2022-2023, and 2023-2024. The headline conclusion continues to be unsurprising. Some 91%of traders lost money in 2023-2024, too. However, this updated report is quite interesting in many other ways. Its analysis has a level of detail that does throw up patterns that, if not surprising, are quite interesting. Some of these also point to the direction that regulatory changes should take.
I have collected some of these here, which I would like my readers to pay special attention to simply because they will help them build a mental picture of what is going on.
Individuals made losses in F&O, and the FPIs and proprietary traders earned profits. Proprietary traders earned about Rs.33,000 crore of gross profits in the F&O segment in 2023-2024, followed by FPIs, who earned about Rs.28,000 crore in gross profits. Individuals and others incurred a loss of over Rs.61,000 crore in 2023-2024. Algorithmic trading outfits made the most profits for FPIs and proprietary traders. 97% of profits of FPIs and 96% of profits of proprietary traders came from such entities in 2023-2024.
The percentage of individuals making losses in futures is consistently lower than that in options. In 2023-2024, about 60% of traders made net losses in futures, compared to 91.5% in options. In futures, individuals made an average net profit of about Rs.60,000 in 2023-2024, compared to a loss of `1,28,000 per person in 2022-2023.The proportion of young traders (those under 30 years old) trading in F&O has increased significantly from 31% in 2022-2023 to 43% in 2023-2024. Nearly 93% of these young traders incurred losses in F&O in 2023-2024, higher than the average loss maker of 91.1% in 2023-2024. Over 75% of individual F&O traders in 2023-2024 declared annual incomes of less than Rs.5 lakh.Almost half of all the F&O traders in 2023-2024 (42 lakh traders) were “New Traders” (i.e. traders who traded for the first time in three years in the equity F&O segment). 92.1% of these “New Traders” experienced losses and, on average, experienced a net loss of about Rs.46,000 per person in 2023-2024.
From 2021-2022 to 2023-2024, individuals incurred more than Rs.50,000 crore in transaction costs for trading in F&O. On average, individual traders spent Rs.26,000 per person on F&O transaction costs in 2023-2024. Nearly 71% of transaction costs were in the form of brokerage (51% of TC) and Exchange Fees (20% of TC); the rest were taxes.
So this is the story: there’s a continuous huge increase in the number of people who trade F&O. A large number have low income. Individuals lose money while the big operators make money. Remember, derivatives are a zero-sum game; all profit comes from someone else’s loss. On top of that, there are massive brokerage and exchange fees.
The net conclusion is inescapable. You have heard many (including me in the past) say that this is gambling. Actually, this data shows that it is not— it’s robbery. Exchanges, brokers and the big algo traders are taking money from small investors’ pockets.
The question is, what is the regulator going to do about it.
The Author is CEO, VALUE RESEARCH
