The momentum gained by equity futures and options during the pandemic, when a rush of retail investors began trading in derivatives, is continuing. While growth in derivatives is good because it imparts depth to the market and provides hedging instruments, the concentration of the entire turnover in just three contracts — Bank Nifty, Nifty and FinNifty — is a concern. 

Here are a few trends indicated by data in the SEBI annual report. 

Almost all the trading in equity futures and options takes place on the NSE, with the BSE having a negligible share. The BSE has been unable to make any headway despite attempts, thanks to the first-mover advantage gained by the NSE. 

The number of stock future and option contracts traded on the NSE grew 124 per cent in FY23 compared to FY22, from 1,866 crore to 4,177 crore. The value of the contracts traded also galloped in tandem, up by 125 per cent. Outstanding contracts towards the end of FY23 were 88 per cent higher. 

Concentrated trading 

While the growth in trading is not a bad thing, the problem is that it is concentrated in index options, which accounted for 98 per cent share in FY23, as against 95 per cent in FY22. Single stock options make up the rest, with scant trading in stock and index futures. 

Within the index options, trading is largely limited to three contracts — Bank Nifty, Nifty50 and FinNifty. In FY22, only the first two contracts were traded. But in FY23, FinNifty, which includes other financial services companies, besides banks, has become increasingly popular, garnering 7 per cent share. Bank Nifty dominates with 56 per cent share while Nifty’s share is 36 per cent. 

If we consider the participation in equity derivatives, brokers trading in their proprietary books have the largest share at 38 per cent. But the share of retail investors and high net-worth individuals (HNIs) has increased sharply in recent years to touch 34.8 per cent. Foreign portfolio investments (FPIs) are a distant third at 16.6 per cent, followed by corporates and mutual funds at 6.3 and 4.1 per cent, respectively. 

Need to broad-base 

The concentration of equity F&O in Nifty and Bank Nifty contracts is nothing new. Also, the higher liquidity in these contracts is not a bad thing because institutional investors, including foreign investors, would hedge their India exposure through index options. 

The worrying factor is the increased retail investor participation in equity F&O, especially the three option contracts. With data showing that most investors lose money trading equities, there could be a case for disincentivising retail participants in index option contracts.