India’s equity derivatives market, a vital tool for price discovery and risk management, faces scrutiny as regulators implement cautious reforms to address retail trader losses and market volatility amidst evolving structural concerns.
India’s equity derivatives market has become a case study in both scale and strain. As Business Standard noted in its latest column on the issue, derivatives still serve a useful purpose: they help with price discovery, deepen markets and allow investors to manage risk. But the same market has also raised persistent questions about whether retail traders understand what they are taking on, and whether the structure of short-term trading is making the system less resilient.
The concerns are not new. Since the Securities and Exchange Board of India first examined futures and options trading in early 2023, the regulator has repeatedly found that individual investors fare badly. A separate study reported by The Telegraph India found that more than 91% of retail traders lost money in F&O in 2023-24, with average losses of about ₹1.2 lakh each, following a similar earlier finding that 89% of individual equity derivatives traders were in the red in 2021-22. Business Standard said the latest Sebi study points to the same broad pattern: in FY26, individuals still accounted for heavy losses, even if participation has eased.
That moderation matters. According to Business Standard’s analysis of Sebi data, active individual F&O traders fell 18% in FY26, marking the first annual decline since FY16. Total individual losses also dropped, though the average loss per trader edged up. Even so, the underlying structure remains skewed towards small accounts taking large risks. The paper said 35% of individuals who traded derivatives over FY25 and FY26 had no equity holdings at all, while 78% had portfolios worth less than ₹1 lakh and suffered 70% of total losses.
Regulators have responded cautiously rather than by trying to shut the market down. In 2025, Sebi moved to cut back the frenzy around expiry-day trading, first by limiting expiries to Tuesdays and Thursdays and then by bringing in intraday position caps for index options from October 1, 2025. Sebi chairman Tuhin Kanta Pandey has since said an outright end to weekly expiries would be impractical, according to reporting in The New Indian Express and The Economic Times, underscoring the regulator’s preference for gradual, data-led reform rather than a sudden clampdown.
Even after those changes, the deeper issue remains the gap between India’s large derivatives market and the much smaller cash market underneath it. Business Standard said expiry-day turnover in index options has eased, but most activity still clusters close to expiry, which keeps the market heavily tilted towards very short-term speculation. The column argued that stronger cash-market depth, better securities lending and borrowing, and a fresh look at margin rules could help restore balance. The aim, it said, is not more rules for their own sake, but a safer market that works better for both institutions and retail investors.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
