Retail capital. On a high: Retail players dominate capital market trading on NSE

India is witnessing a boom of retail traders and investors in the capital markets. Latest data show that with a 45 per cent share in overall trading turnover on the National Stock Exchange, retail participants are way ahead of foreign institutional investors (FIIs), corporates, propriety traders and domestic institutional investors (DIIs). Retail investors are leading in derivatives trading too and have showed a marked increase, especially when it coms to the more riskier options bets.

Retail or individual investor turnover on the NSE was 33 per cent during FY16 and has risen by 12 per cent. Proprietary traders, who are stock brokers trading on their own books, accounted for a modest 25 per cent of the overall turnover in FY21 compared with 21 per cent in FY16.

Turnover down

In contract, despite the record FPI flows since 2015, their turnover or participation on the NSE has witnessed a fall from 23 per cent in financial year (FY) 2016 to just 11 per cent in FY 2021. During the same period, contribution of corporates to the turnover of the NSE has halved to 5 per cent from 10 per cent six years ago; the contribution of domestic institutional investors (DIIs) has declined from 9 per cent to 7 per cent. Experts are also attributing the fall in corporate trading on the NSE to the government’s crackdown on shell companies between 2016 and 2018 when a list was put out by market regulator SEBI.

The NSE claims to have added nearly 90 lakh new investors during the financial year 2021. Data show that the BSE has added 1.78 crore new investors between May 2020 and this year so far and has a total of 6.74 crore investors registered with it. Mutual fund investments via BSE have been hitting record highs month on month with over ₹33,735 crore worth trades in April.

“For retail players who are trading more, unwillingness to absorb some uncertainty and try and trade every crevice in market movements is a desire to find certainty. It defies the basic building block of any returns that without the ability and willingness to absorb some risk, no returns can be produced. Ultra short term, heavily leveraged intra-day trading adventures are against the natural laws of risk,” said Sushil Kedia,Founder & CEO of KEDIANOMICS.

Derivatives trend

Here too retail players dominated. In the last six years, retail participation saw a marked increase in equity derivatives segment, which the NSE says was in line with cash segment. While their share in equity derivatives premium turnover has increased nearly 2 per cent their share in notional turnover has increased seven 7 per cent during this period. Retail players dominate with 30 per cent share in derivatives (premium) turnover where FIIs have 21 per cent share currently. In the same segment, turnover of corporates has gone down from 31 per cent in FY 2016 to 31 per cent now while prop traders have gone down to 8 per cent from 15 per cent. In terms of notional turnover, retail players stand at 29 per cent, FIIs at 13 per cent, corporates are at 43 per cent (FY16 was 49 per cent) and prop traders are at 7 per cent.

Retail players held 25 per cent share in stock futures, FIIs 25 per cent, corporates 29 per cent, prop traders 9 per cent and DIIs were 5 per cent while 8 per cent was rest. Retail players and proprietary traders investors together hold the largest share in index options trading. Prop traders were 39-43 per cent in index options based on notional and premium turnover and retail players were 29-32 per cent. FIIs were 13-16 per cent and corporates 6-7 per cent. In the currency derivatives too, retail players have a 22- 24 per cent share in turnover. Share of individual investors in the cash market turnover has shot up to 46 per cent during April-December 2020 versus 39 per cent in FY20.

“Options Trading is a lure in which under-capitalized smaller investors are being sucked in by too many trading babas on social media, selling them a bad dream. It’s going to end badly, since the stock market is a place to do sensible business and not wager on dreams,” said Kedia.

According to him, unless capital formation from retail translates into similar enlarging of the delivery buying and investing pie, a mountain of coalesced risk was building. “The way a diamond that is twice in weight to a smaller diamond and yet its value is much more than twice, a risk or type of risk that is more and more widely undertaken, the value of that risk multiplies manifolds. Crowding of risk is dangerous for individuals, for the market and for the economy,” said Kedia.

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