New Delhi: Individuals trading in India’s derivatives market made a cumulative net loss of more than Rs 1.8 lakh crore over the three years from 2021-22 to 2023-24, with 93 percent of the traders making losses during this period, a new analysis by market regulator Securities and Exchange Board of India (SEBI) has found.
The study, published Monday, found that individual traders on aggregate made losses in the options segment of the derivatives market in all the three years that were analysed. Meanwhile, in the futures segment, they made losses in the first two years—2021-22 and 2022-23—but were able to make aggregate profits in 2023-24.
Notably, the study also found that while individuals made significant losses in the derivatives segment, foreign portfolio investors or FPIs and proprietary traders made substantial profits—especially the ones that used sophisticated algorithms to conduct their trades.
It also noted that, despite these losses, the overwhelming majority of the loss-makers returned to the market, only to make further losses.
“With rising participation of individual investors in both equity and equity derivatives and exponentially growing volumes in the derivatives in the recent past, it was felt necessary to understand the changing pattern in the profits and losses of all categories of investors (including individual investors),” the study said.
“More attention is given to the individual category investors, as almost 99.8 percent of the F&O (futures and options) participants are individuals,” it added.
Also Read: Five debt defaults, two NPAs & 100% value erosion. MTNL barrels towards a major financial crisis
Large & rising losses in options trading
Notably, the Rs 1.8 lakh crore net loss figure for individuals trading in F&O is arrived at by subtracting the profits from the total losses. What this means is that the individuals who lost money, actually lost a larger amount—Rs 2.06 lakh crore—over this period.
These loss-makers numbered 105.1 lakh traders, or 93 percent of the 113.2 lakh traders who were involved in the derivatives market in the 2022-24 period. The remaining seven percent, who made profits, gained just Rs 25,020 crore over this period, highlighting the low success rate and payout of trading in derivatives.
“Distribution of losses is highly skewed towards the loss-makers,” the study said. “While about 10,800 traders made losses of more than Rs 1 crore in F&O (futures and options) segment combined for all three years, only about 2,500 traders made profit of more than Rs 1 crore.”
It added, “These top 10,800 traders in terms of highest losses, incurred an average loss of more than Rs 2 crore per person over the period of three years.”
The amount of losses being made in the options segment has increased every year of the analysis. Losses on options stood at Rs 37,539 crore in 2021-22, which increased to Rs 59,524 crore the next year, and further to Rs 77,833 crore in 2023-24.
Trading in the futures segment, on the other hand, resulted in losses in 2021-22 of a much more modest Rs 3,285 crore, which grew to Rs 6,223 crore in 2022-23, before turning into profits of Rs 3,021 crore in 2023-24.
Stubborn & damaging persistence despite losses
Despite these large losses—and the fact that 2023-24 saw the futures segment yielding aggregate profits—the overwhelming majority of traders preferred the options segment, where they continued to lose money.
According to the data, 99.3 percent of the derivatives traders traded options at least once during FY24, while 94.2 percent of the traders traded only options and just 0.7 percent of them traded only futures.
This bullheadedness in the face of losses was highlighted by SEBI in its report as well.
“As many as 76.3 percent of the loss-making traders persisted with the trading in F&O, in spite of making losses in preceding two consecutive years,” the study noted. “Out of 24.4 lakh investors who made losses in both FY22 and FY23, 18.6 lakh traders continued to trade in the third year, while 5.8 lakh traders stopped trading in the third year.”
It also found that this persistence rarely paid off, since only 8.3 percent of traders who persisted to trade in F&O in the third year in spite of losses in two preceding years actually succeeded in making a profit in the third year.
Beaten by the machine
The data also showed that while individuals made losses on F&O trades, the profits were made by FPIs and proprietary traders—both of which use sophisticated tools and algorithms for their trades.
In order to compare across segments of traders, the analysis also looked at gross profits, which does not take into account the cost of the transaction itself because those costs vary for each segment.
“The proprietary traders earned about Rs 33,000 crore of gross profits in F&O segment in FY24, followed by FPIs who earned about Rs 28,000 crore in gross profits,” the study found. “Against this, individuals and others incurred a loss of over Rs 61,000 crore in FY24 (before accounting for transaction costs).”
The advantage provided by algorithms was also made clear in the data, which showed that 97 percent of the profits of FPIs and 96 percent of the profits of proprietary traders came from those that employed algorithmic trading.
(Edited by Radifah Kabir)
Also Read: Chemistry of curd to physics of paratha, GST rates on food are a multi-disciplinary tangle