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- SEBI tightened retail options trading after finding 9 in 10 traders lose about $1,400 a year, lifting the minimum contract size and banning broker credit.
- Index-options turnover has fallen 52% in about a year and registered derivatives participants have dropped from nearly 10m to 7.9m.
- A new 20-minute closing auction and a 50% surge in margin debt to $15bn between mid-2025 and mid-2026 point to risks shifting, not disappearing.
Mumbai
India’s market regulator set out to shield small investors from ruinous options bets. Volumes in India options trading have plunged, but volatile closing auctions and soaring margin loans suggest the risks have merely moved elsewhere.
Reaching India’s upper middle class frequently depends on beating long odds. Hundreds of thousands enter the H-1B lottery for an American skilled-worker visa. Millions sit examinations for a handful of prized state posts. And millions more are taking a chance on derivatives.
Options — contracts granting the holder the ability to purchase or dispose of an asset at a set price at a later date. A small premium controls large notional value, so a 2% move in a benchmark index can create a “multibagger” worth several multiples of the stake.
Why SEBI targeted retail options trading
The appeal is leverage. Since a modest premium can control substantial notional value, the lucky can convert a 2% shift in a benchmark index into a “multibagger” worth several multiples of the initial stake. Most speculators, however, prove unlucky.
Research from the Securities and Exchange Board of India (SEBI) concluded that nine in ten participants lose about $1,400 annually — an enormous amount measured against Indian incomes.
Loss figure is SEBI research cited in the article: nine in ten participants lose about $1,400 per year. Turnover and participant figures cover index options, the most favoured variety.
How SEBI’s crackdown cut volumes
SEBI has sought to deter newcomers through a larger minimum contract size, a ban on broker-provided credit and additional curbs. It has also gone after market-makers it believes exploit naive counterparties.
It is pursuing proceedings against Jane Street, an American hedge fund accused of market manipulation. On August 20th it barred a Mauritius-based entity controlled by JPMorgan Chase, an American bank, over comparable violations.
Together, these steps have cooled the options frenzy. Over roughly the past year, turnover in index options has dropped by 52% while the count of registered derivatives participants has slipped from nearly 10m to 7.9m.
Turnover in index options, past year
Registered derivatives participants, from nearly 10m
Margin debt, up 50% mid-2025 to mid-2026
The new 20-minute closing auction to stop “marking the close”
On August 3rd the National Stock Exchange and the Bombay Stock Exchange (BSE) added, at the close of continuous dealing, a 20-minute “closing auction” covering the roughly 200 stocks that underlie options (and futures).
A stock’s closing level is now the price that clears every auction order while maximising traded quantity. That replaced the prior approach, under which closes tracked the volume-weighted average price across the final half-hour of normal trading.
What regulators wanted to prevent
Part of the motivation was to stop large operators from “marking the close”. That tactic involves executing carefully timed deals immediately before shutdown, when most participants have left and liquidity is thin, to nudge the settlement price and secure a derivatives payoff. SEBI levelled that type of allegation against Jane Street. Jane Street maintains its activity constituted ordinary market-making.
Why the fix has made trading more volatile
Even if the auctions deter manipulators, they are creating turmoil for options holders. Since traders can view only their own bids and asks, market-makers — who rely on the visible gap between the two sides — largely stay aside.
Deprived of that liquidity, dealings become sparse and erratic. On August 27th prices of constituents in the BSE’s Sensex index plunged by 3% within moments during the closing auction. For holders of connected options, such violent moves can produce either a windfall or a wipeout.
- Closing price = volume-weighted average price across final half-hour.
- Thin late liquidity left room for “marking the close”.
- 20-minute auction for ~200 option-linked stocks; close = price that clears every auction order while maximising quantity.
- Aim to deter manipulation, but opacity has thinned market-maker participation.
Risk hasn’t vanished — it has moved to margin debt
A further consequence is driving precisely the Indians SEBI hopes to shield toward hunting multibaggers in other corners. Aggregate margin debt provided by brokers to clients seeking amplified returns — while facing magnified losses — expanded by 50% between mid-2025 and mid-2026, to $15bn.
“Scary”
Nithin Kamath, co-founder of Zerodha, on the surge in margin trading
Nithin Kamath, co-founder of Zerodha, a widely used brokerage app that provides margin trading, has described it as “scary”. India’s aspirants will not be deterred so readily.
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Sources
Securities and Exchange Board of India research on retail derivatives losses; National Stock Exchange and BSE closing-auction rules effective August 3rd; market data on index-options turnover and registered participants; margin-debt data mid-2025 to mid-2026.
Audio: via Economist content asset as listed.
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