Options Traders Support SEBI’s Intraday Limit, Seek Higher Caps

Large options traders, including fund managers and brokerage firms with proprietary trading desks, believe that the Securities and Exchange Board of India's (SEBI) proposed limits on gross future-equivalent or delta-based positions could help prevent market manipulation by a single entity.

However, opinions are divided on the extent of the cap. Some argue that the proposed gross limit should be doubled, while others advocate for a significantly higher increase. The latter group contends that the suggested cap would only account for a fraction—about a tenth—of the exposure typically taken by major proprietary trading firms.

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In a discussion with Moneycontrol, SEBI’s Whole-time Member, Ananth Narayan, indicated that the regulator is open to reconsidering the limits if market participants provide relevant data to support their case.

On February 24, SEBI released a consultation paper titled "Enhancing Trading Convenience and Strengthening Risk Monitoring in Equity Derivatives", proposing a revised approach to measuring market risk. It suggests shifting from the existing notional open interest (OI) system to a delta-based OI method to better assess individual and overall market risk.

Open interest refers to the total number of active derivatives contracts in the market.

While this shift has been largely welcomed by major options traders, another proposal in the paper has raised concerns—introducing a gross delta-OI-based position limit.

The proposed framework would monitor intraday positions to ensure they remain below a net delta-OI-based cap of ₹1,000 crore and a gross delta-OI-based cap of ₹2,500 crore for options contracts tied to a single index.

(This is separate from the suggested end-of-day (EOD) and intraday futures limits of ₹1,500 crore—three times the current level—and ₹2,500 crore, respectively.)

While large market participants generally accept the net cap for options contracts, opinions differ on the appropriate level for the gross delta-OI-based limit.

SEBI’s objective with this cap is to address risks that may not be fully captured by a delta-focused metric. Instead of setting individual limits for each of the Greeks (gamma, theta, vega, and delta), the regulator opted for a gross future-equivalent or delta OI limit as a proxy to account for all residual risks.

While fund managers acknowledge the rationale behind this approach, they have differing views on the appropriate cap. Some argue that doubling the limit to ₹5,000 crore would provide sufficient room for market makers to maintain liquidity while preventing excessive influence from a single entity. Others believe the cap should be increased three to four times (₹7,500 crore to ₹10,000 crore) to accommodate the exposure currently taken by large proprietary trading firms.

The key challenge for regulators is to strike a balance between preventing manipulative trading practices and preserving market liquidity.

The Balancing Act

In recent times, fund managers have expressed concerns that India's derivatives market may be manipulated by a single entity or a small group of traders. These alleged manipulators either drive the underlying index sharply in one direction to benefit from their derivatives positions or keep it within a narrow range to maximize profits. Moneycontrol has previously reported on these concerns.

If SEBI's proposed gross limits are implemented, manipulation would require coordination among 10 to 11 entities. If the limits were doubled, around seven to eight entities would need to collaborate—making such activities considerably more difficult, according to a hedge fund manager.

A proprietary trader from a brokerage firm, who has voiced concerns about potential market manipulation, agrees that the proposed restrictions would curb such practices. However, he also warns that they could significantly impact proprietary trading desks, which primarily trade using their own capital and provide crucial market liquidity.

"Different trading firms will have varying opinions on how much the limit should be raised, depending on their current exposure. However, major proprietary trading firms currently operate at exposure levels nearly ten times the proposed limit. The regulator is essentially asking them to close down," he stated.

Mayank Bansal, a well-known options trader, believes that a modest increase—doubling the limit to ₹5,000 crore—would be sufficient to prevent market manipulation while allowing proprietary trading firms to continue their operations.

"The limits represent a trade-off between preventing potential manipulation and ensuring large entities can sustain their businesses," Bansal explained. He further suggested that the ideal approach would be to identify and penalize the entities engaging in manipulation, rather than imposing overly restrictive limits across the board.