Stock exchanges and brokers, catering to retail traders, could be hit hard by the regulator SEBI’s proposed measures for Futures & Options (F&O) trading regulations, with market volumes slumping 30-40%, according to reports.

If these measures are implemented, the number of investors could decrease, it added.

Moreover, discount brokers, who depend heavily on retail investors, are expected to be more affected than traditional full-service brokers.

SEBI, in its consultation paper in July, proposed seven measures, including increasing minimum contract size and upfront collection of option premiums, intra-day monitoring of position limits, rationalisation of strike prices, removal of calendar spread benefit on expiry day and increase in near contract expiry margin.

SEBI stated that these measures are aimed at enhancing investor protection and promote market stability in derivative markets.

According to a report by Jefferies, Sebi’s proposed measures to reduce the number of weekly option contracts from 18 to 6 could impact around 35 per cent of industry premiums. However, if trading shifts to the remaining contracts, the overall impact can be reduced to 20-25 per cent.

Among its 7 proposed measures, IIFL Securities see the highest impact from the withdrawal of weekly options (only 1 per exchange allowed) as index Options account for 98 per cent of the volumes.

IIFL Securities expects the National Stock Exchange (NSE) to be more affected than the BSE because 60% of NSE’s revenue comes from options trading, compared to 40 per cent for BSE. It estimates that by the financial year 2026, NSE’s earnings could be reduced by 25-30 per cent while BSE’s earnings could drop by 15-18 per cent.

Jefferies also believes that removal of Bankex weekly contract can impact BSE’s earnings per share (EPS) by 7-9% over FY25-27.

It further said that BSE might see a small decline in earnings, but if trading activity shifts from discontinued products, it could offset the impact or even lead to earnings growth.

“We don’t see any impact on MCX from these regulations. Within the value chain, discount brokers are likely to be more impacted than traditional full service brokers given former’s dependence on retail investors,” IIFL Securities said.

Jefferies believes that clearing members like Nuvama, which caters to institutional players High-Frequency Traders (HFTs) and Foreign Portfolio Investors (FPIs) are less impacted.

Rationalizing weekly options to only one benchmark index per exchange will significantly affect the NSE because it currently has four weekly index expiries, with “Bank Nifty” being the most important, contributing to 50% of its options volume. The change could reduce NSE’s overall trading volumes by 30-35%, IIFL Securities said. On the other hand, BSE is expected to be less affected since it only has two contracts, with Sensex making up 85 per cent of its volumes in FY24.

Even if “Bankex” contributes 30% by FY26, the impact on BSE’s volumes is expected to be smaller compared to NSE, it said.

Additionally, with just two expiries, BSE might actually gain market share and experience higher trading volumes, resulting in an estimated 20 per cent reduction in its overall volumes, it added.

Jefferies said that Sebi’s proposed measure of increasing lot sizes by 3-4 times over six months could lead to higher costs for retail traders, potentially reducing their participation in the market.

The proposed margin increase for options sellers close to expiry could reduce leverage and profitability, especially for retail traders with limited funds. “Finally other measures like increasing ELM (extreme loss margin) around expiry, withdrawal of calendar spread margin on expiry will increase the margin requirements and thereby could impact the liquidity. Based on our initial estimates we expect a 30-40 per cent impact on market volume,” IIFL Securities said.

Sebi Chief Madhabi Puri Buch recently mentioned that households are losing up to Rs 60,000 crore a year in the problematic futures and options segment.

Earlier, Sebi research showed retail traders lose money in nine out of 10 trades in the F&O segment Last month, the government in the Union Budget raised the securities transaction tax (STT) on both futures and options trade from October 1 to allay concerns about hyperactive interest in the derivative segment.

Before that, the Economic Survey flagged concerns over rising retail investors’ interest in derivative trading. The survey stated that speculative trade has no place in a developing country.

It also pointed out that the sharp increase in retail investor participation in F&O trading is likely driven by humans’ gambling instincts.