Eighty Percent of the World’s Stock Options Aren’t Traded Where You Think
Bitcoin and GameStop made headlines. But an even wilder speculative mania has emerged in India.
By Megha Mandavia
A bronze replica of the Charging Bull of Wall Street inside the premises of the Bombay Stock Exchange in Mumbai. PHOTO: NIHARIKA KULKARNI/REUTERSU.S. markets have been no stranger to meme-driven, casino-like trading in recent years.
But on the other side of the world, a stock speculation boom is unfolding that makes GameStop and bitcoin look tame—or, at least, well-domesticated.
India accounted for a staggering 78% of equity options contracts traded worldwide in 2023, according to data from the Futures Industry Association (FIA), a global derivatives markets policy advocacy organization.
The number of stock index options traded there reached 84.3 billion contracts last year, up 153% from 2022.
Total futures and options turnover touched a notional value of $4.5 trillion on the National Stock Exchange on Thursday.
The derivatives boom doesn’t necessarily pose an immediate systemic risk.
But individual investors in aggregate are losing large sums, while many brokerages and the stock exchanges are raking in cash.
As in the U.S. in 2021, a big bull market paired with new mobile technology making trading more accessible—and gamelike—has drawn in legions of small investors and social media influencers.
More regulation may be needed to protect the former.
One concern is that nearly all the options being traded are short term, and nearly everyone buying them is losing money.
A report from the Securities and Exchange Board, India’s securities regulator, found that nine out of 10 individual traders in equity futures and options incurred losses in the fiscal year ending in March 2022—an average of 110,000 Indian Rupees, on par with the country’s per capita income.
Weekly, rather than monthly, options accounted for 95% of volumes in October 2023, according to an Axis Mutual Fund report last year. Retail traders held their options for less than 30 minutes, on average, Axis found.
Another is that the pool of investors is expanding rapidly, and many of them may be young and unsophisticated, with relatively few assets.
Active derivative traders, just half a million in 2019, reached four million in 2023 according to brokerage ICICI Direct.
And 36% of individual traders were between the ages of 20 and 30, according to SEBI’s report, up from 11% in fiscal 2019.
Fear of missing out on the country’s long equity boom, especially for those without the assets to own many stocks directly, is a big factor.
Indian stocks have risen for eight straight years, even eking out a small gain in 2022.
Sahaj Agrawal, Vice President of Derivatives Research at Kotak Securities, says newbie investors are rushing in because they feel they are late to the “glamorous” trading game.
Most punters may not be doing well, but there have been some clear beneficiaries: brokerages, the stock exchanges, and the Indian government, which is vacuuming up new transaction tax revenue.
Stock exchanges started offering shorter-duration options during the pandemic-era trading boom.
The Bombay Stock Exchange is now earning nearly as much from equity derivatives, in transaction charge terms, as from the regular cash market.
Just a year ago, those earnings were nil.
SEBI, in addition to publicly warning about the risks for individual investors, has also taken steps like tightening margin regulations, most recently in early 2023.
But so far that has been insufficient to curb the speculative fervor.
More may be needed.
Even assuming those enormous trading volumes don’t pose a systemic risk, the rapid emergence of such a highly profitable industry for exchanges and brokers—and such a highly unprofitable one for actual investors—raises obvious questions.
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