SEBI Flags Derivatives Imbalance: Short-Term Options Overshadow Cash Market, Calls for Deeper Reform

Updated: July 17, 2025 12:23

Image Source: Hindustan Times

India’s market regulator, the Securities and Exchange Board of India (SEBI), has raised fresh concerns over the explosive growth of short-term equity derivatives, particularly index options, which now overshadow cash market volumes by over 350 times on expiry days. In a recent statement, a SEBI Whole-Time Member warned that this imbalance is “clearly unhealthy” and detracts from the core purpose of capital markets—long-term capital formation.

Key Concerns Raised by SEBI

Short-Term Contracts Dominate: Weekly index options have surged, with expiry-day turnover exceeding cash market volumes by 350x, raising red flags about speculative trading.
Capital Formation at Risk: SEBI emphasized that excessive short-term trading diverts household savings from productive investments.
Retail Losses Mounting: A SEBI study revealed that 91% of retail traders lost money in F&O trading in FY25, totaling losses of over ₹1.05 lakh crore2.
Need to Deepen Cash Equities: SEBI urged stakeholders to strengthen participation in the cash market, which supports long-term investment and economic growth.

Regulatory Measures in Motion

To curb speculative frenzy and protect retail investors, SEBI has proposed and begun implementing several reforms:

Limit Weekly Expiry: Only one benchmark index per exchange will have weekly expiry contracts
Increase Contract Size: Minimum derivative contract value raised to ₹15 lakh
Upfront Premium Collection: Mandatory for all options buyers to reduce leverage
Intraday Position Monitoring: Exchanges must track position limits throughout the day
Strike Price Rationalization: Fewer, more structured strike options to reduce volatility
Calendar Spread Removal on Expiry Day: To prevent offsetting speculative positions

These changes will be rolled out in phases starting November 20, 2025.

Expert Commentary

“The derivatives market has become a speculative playground. SEBI’s reforms aim to restore balance and refocus investor attention on long-term value creation,” said a senior market strategist at Axis Securities.

Sources: Times of India, Financial Express, FIA – Explainer, Hindustan Times, Economic Times

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