Sebi’s options plan which spooked many could be in for a review

The Securities and Exchange Board of India’s planned review comes after brokers, proprietary desks and institutional traders flagged risks of reduced market liquidity and higher trading costs in India’s derivatives market if the rule is implemented.

The regulator recently proposed to change the way of calculating open interest (OI) and introduced a new gross limit for index options. Open interest refers to the outstanding or open derivatives positions of all participants. Sebi believes the move will help curb manipulation in individual stocks and accurately reflect risks in index options.

According to three brokers Mint spoke with, the new gross limit will reduce liquidity and widen bid-ask spreads, raising the cost of executing a trade. The bid-ask spread is the difference between the highest price a buyer is willing to pay (the bid price) and the lowest price a seller is willing to accept (the ask price). The likely loss of liquidity by Sebi’s proposal could make it costlier for clients to enter and exit markets, brokers fear.

Also read | Sebi’s settlement system under fire: Delays, discretionary powers spark concern

“Sebi will look into the comments, and consider revising the proposal for gross limits. However, the end result will be that those looking to manipulate trading will not be able to do so”, the person cited earlier said.

Sebi received close to 1,000 responses. While the feedback was unequivocal against the new gross limit proposal, most of it contained positive feedback on the shift to calculating OI using delta, the person cited earlier said on the condition of anonymity.

Sebi has proposed calculating open interest of index options based on delta, which measures the change in option price for every point change in the underlying stock or index. For instance, if the spot Nifty changes by Re.1 and the Nifty option changes by 50 paise, the delta is 0.5.

Market participants said a gross limit to address risks doesn’t make sense, as the simultaneous buying and selling of options at different levels itself seeks to reduce risk.

“This proposal of adding the net long and short deltas separately goes against the basic principles of encouraging lower risk positions versus higher risk positions,” said Rajesh Baheti, director of Crosseas Capital, which specializes in jobbing and arbitraging.

Also read | Madhabi Puri Buch’s Sebi tenure: A legacy of reform, controversy, and resistance

Net limit measures the difference between the long and short options deltas, while gross limit sums up the deltas of all purchased and sold options.

However, Sebi has stressed on the need for a gross limit, stating options risk was not determined by delta alone, but by parameters like volatility and time as well, which net delta doesn’t capture. Sebi added it didn’t want to introduce the complexity of setting explicit limits for each of these parameters. Market participants were asked to submit comments by 17 March. Sebi received close to 1,000 responses, and most of it contained positive feedback on the shift to calculating OI using delta, the person cited earlier said on the condition of anonymity.

“By adding the net deltas, the positions of big funds will be crimped as they won’t be able to hedge their portfolios effectively and to the desired volume, impacting overall market liquidity,” said an official with a broking firm which has opposed the proposal. He claimed that most brokers were against totalling net positions to calculate an end of day gross limit of 1,500 crore.

Also read | NSE vs BSE: Sebi’s curbs, exchange moves reshape options market

A Sebi spokesperson didn’t respond to queries.

Sebi’s latest proposals follow its 1 October directives tightening derivatives trading for retail traders, who it said suffered a 1.8 trillion loss trading derivatives during FY22-24. Their loss was the gain of counter-parties like large proprietary traders and foreign portfolio investors.

The current proposals are believed by brokers to be aimed at containing excessive options speculation by prop and institutional traders.

“There is a growing belief in the market that these revised limits, especially the gross limits, could significantly impact the ability of large proprietary trading desks (prop), high-frequency trading (HFT), and foreign portfolio investors (FPIs) to trade as they have been,” said Ashish Nanda, president and head of digital business at Kotak Securities. “This could lead to a drop in trading volumes, though the exact extent remains unclear, with estimates varying widely. “

Also read | How Sebi’s serial crackdown crimped F&O volumes and crashed broking-firm stocks

Absolute number-wise limits for index options and futures were introduced during the pandemic outbreak when the market slumped 32% to a low of 7511.10 in March 2020, induced by FPI selling of a record 61973 crore during that month. Prior to the pandemic, a 5% limit of overall open position existed for clients, a broker said.

  • Aniket Pujari

    Aniket Pujari

    Aniket Pujari, a graduate in Financial Markets, is the founder of Minute To Know News, a digital platform providing daily news updates on cryptocurrencies, finance, and economics. With a passion for finance and technology, Aniket has been exploring the world of cryptocurrencies since 2015, building a deep understanding of these rapidly evolving industries.

    Related Posts

    Former CNBC Awaaz anchor, family banned by Sebi for insider trading

    The Securities and Exchange Board of India (Sebi) has barred former CNBC Awaaz news anchor Hemant Ghai, his wife Jaya Hemant Ghai, and his mother Shyam Mohini Ghai from participating…

    US Fed Policy: Will Donald Trump’s tariff chaos pinch Jerome Powell? Interest rate to ‘dot plot’—5 indicators to watch

    US Fed Policy: The US Federal Reserve is all set to announce its monetary policy decision on March 19, after a two-day review meeting to deliberate on the central bank’s…

    Leave a Reply

    Your email address will not be published. Required fields are marked *

    You Missed

    RWA boom is inevitable, but BSC sell-offs expose crypto risks: pro

    RWA boom is inevitable, but BSC sell-offs expose crypto risks: pro

    New Jersey Devils introduce AI chatbot ‘Bott Stevens’ via Theta EdgeCloud

    New Jersey Devils introduce AI chatbot ‘Bott Stevens’ via Theta EdgeCloud

    Rethinking 60/40 portfolio in a volatile era, according to Morgan Stanley

    What sets Lightchain AI apart from Trump and Melania memecoins

    What sets Lightchain AI apart from Trump and Melania memecoins

    3 megacaps tackle AI buildout, while Meta gets a big nod from Street

    Stagflation? Fed sees higher inflation and an economy growing by less than 2% this year