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Navigating the F&O Landscape: Five Key Lessons from SEBI’s Eye-Opening Study

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Recently, SEBI published a study about the F&O trading activities in India. This is the second such study by the regulator to understand how profitable (or loss-making) are derivative traders in India.

Scope of Study

This study is a near representation of the market. This study does not do a census where it looks at all actual data of each active trader. It is also not a sample-based study where it looks at a few clients and extrapolates. This study captures actual data from ~90% of all the traders in the Indian market and derives insights from this data.

The below table shows the coverage of the study.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

We can safely say that all insights from this study are very much representative of the actual P&L of all Individual traders in the Indian Markets.

The key takeaway from this study (FY 22 – FY 24):

  • 93% of Individual F&O traders lost money in three years from FY22 – FY 24. In this period, 1.13 crore unique Individual traders incurred a combined net loss(i.e. trading loss inclusive of transaction costs)of ₹1.81 lakh crore in F&O.
  • More than 1 crore loss-making traders(92.8% of individual traders)lost, on an average, about ₹2 lakh per person in the F&O over the period of three years.
  • Top 3.5% of loss-makers, approximately 4 lakh traders, faced an average loss of ₹28 lakh per person over the same period, inclusive of transaction costs.
  • Only 7.2% of Individual F&O traders made a profit over the period of three years.
  • Only 1% of individual traders managed to earn profits exceeding ₹1 lakh, after adjusting for transaction costs.

We’re not summarising the study, it is already well explained. Instead, we are listing out 5 insights, that stood out for us, from this detailed study.

Insight 1: It’s not a zero sum game

When you buy or sell a derivative contract, the simple assumption is that either you or the counterparty will make money. However, this is not the case. It’s a negative-sum game. Brokerage fees, transaction costs, and taxes can eat up to 25% of your profits or add significantly to your losses.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

The cost of trading Futures & Options (F&O) amounts to 25% of your profit and loss (P&L). Brokerage accounts for 51% of the transaction costs, exchanges take 20%, and the government collects the remaining 29%. Over the past three years, approximately 1 crore individual traders have contributed around ₹50,000 crores in transaction costs.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

Insight 2: Sophisticated computer algorithms are eating your lunch

Here’s a breakup of who actually made money off the Individual traders. Do note, the numbers here are gross profits and they do not capture transaction costs.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

In FY24, all the profits were made by proprietary firms and Foreign Portfolio Investors (FPI) through algorithmic trading. This trading mainly involves High-Frequency Trading, arbitrage, trend following, or other quantitative strategies.

You might think, “Ah, algorithmic trading is the solution!” But no—the data shows that individual traders who used algorithmic strategies also incurred losses overall. This means that simply investing through an algorithm isn’t enough. The algorithm must be able to capitalize on market anomalies and inconsistencies to be profitable.

Insight 3: Options are the poison pill

This study is for F&O traders which includes traders for both Futures and Options segment. But as you may have noticed from social media and people around you, almost everyone is trading options and not futures.

  • 99.3% of the F&O traders traded options at-least once during FY 24. So almost everyone is trading options.
  • 94.2% of the F&O traders traded only Options. Overwhelmingly hight majority is trading just options and not futures.
  • 5.1% traders traded both Futures as well as Options. Only a handful (0.7%) of the F&O traders traded only Futures.

Now, get this: the small 5% minority that actually trades futures managed to generate profits in FY24, on average. Yes, individual traders made more in futures than both FPIs and proprietary firms combined.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

Does that mean individuals should trade futures instead of options? No.

It simply shows that trading a simpler instrument like futures, which typically depends only on the price of the underlying asset, gives you an advantage in a one-sided trending market. The bull market of FY24 seems to have favored individual traders, who are generally bullish by nature.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

On the flipside, options are complex. Their movement depends on several factors: the price of the underlying asset, time to expiry, market volatility, and the invisible hand of the market. It’s a complicated beast to navigate, and most traders end up being devoured by it. Just look at the chart—imagine a 50% rise in the markets, and yet, during the same period, 90% of option traders still lost money.

Insight 4: Size does not matter. Everyone gets butchered.

We might assume that individuals with higher capital have access to better advisors, insights, or are generally smarter. But the data shows that most traders, regardless of capital size, incur losses. The options market seems to be quite efficient in this regard.

The percentage of traders losing money doesn’t change with the amount of trading capital. The last column shows that the profitability across each segment is similar. In fact, larger traders contribute more to the overall loss than smaller traders, as shown in column 3.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

Insight 5: Traders based outside of Tier-1 cities incur more losses.

In the mutual fund industry, cities are divided into two key clusters to measure the penetration of mutual funds in India:

  • Top 30: Comprising the top 30 cities by mutual fund investments.
  • Beyond 30: Comprising cities beyond the top 30.

Mutual funds are a well-penetrated and robust instrument for participating in financial markets. This report uses mutual funds as a baseline.

  • In the top 30 cities, for every 100 mutual fund investors, there are 17.6 F&O traders.
  • In cities beyond the top 30, for every 100 mutual fund investors, there are 28.6 F&O traders.
  • This indicates a higher penetration of F&O trading in cities beyond the top 30 compared to mutual funds.

Overall, around 70% of all traders come from cities beyond the top 30. And since most F&O traders are losing money, it appears that traders from these geographies are worse off. They are disadvantaged because their participation in mutual funds—which have performed well over the past three years—is much lower compared to the losses they face in the F&O segment.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

Individual traders from Tier 1 cities contribute to 37% of the premium turnover while accounting for only 26% of the losses. This means they are generating more turnover but contributing less to the overall loss pool.

In contrast, traders from beyond Tier 1, Tier 2, and Tier 3 cities, categorized as “others” in the table below, contribute 47% to the premium turnover but account for 58% of the overall losses. This indicates that traders with registered addresses in non-urban areas are worse off.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

Bonus Insight: Its a national phenomenon

Traditionally, the western states, led by Maharashtra and Gujarat, have been at the forefront of driving market participation. While they continue to lead, growth in the industry is now emerging from across the country.

  • Among the larger states, the highest percentage growth is recorded by Uttar Pradesh, West Bengal, Bihar, and Punjab.
  • Even the top performers like Gujarat and Maharashtra have experienced growth rates of 107% and 61%, respectively.

Navigating the F&O Landscape: Five Key Lessons from SEBI's Eye-Opening Study

Link to the SEBI report

To sum it up

Trading derivatives is complex business. Its not just the structure of instruments that makes it complex. It’s the unpredictable, erratic and random behaviour of the market forces that makes it complex. To trade such complex products, in the even more complex environment of markets, a trader needs experience & expertise. It is not unlikely, it seems that even a trading experience of 10 years for a single trader may not be enough.

This report shows that more than 90% of 1 crore individual participants fail to make money and instead incur losses. On the other side, a limited number of proprietary traders & foreign portfolio investors (FPIs), make money from derivatives, especially via algorithmic trading. Again, makes the case for better expertise, institutional knowledge, experienced team and technological edge.

Losses happen for other businesses as well. But you always choose a business where you have a higher probability of succeeding over time. A business where you know you have an expertise to start with or where you know if you can eventually build that expertise. In the case of trading derivatives in India, this expertise clearly seems to be with sophisticated proprietary trading desks and institutions.

If you think you can play the game at their level, you have a fair chance of making money in this business. Else, if you don’t have such an edge, the odds are really against you – 93% probability of you being the average trader that lost money.

Don’t trade in the markets as you would do with Casinos. Just like Casinos, the house always wins in the markets too. The whole ecosystem including sophisticated institutions, exchanges, brokers and government, makes money from individual traders.

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