SEBI Cracks Down on Short-Term Derivatives to Curb Volatility

The Securities and Exchange Board of India (SEBI) is taking decisive steps to improve the quality and stability of India’s fast‑growing futures and options (F&O) market. Senior leaders at SEBI are raising alarms about the market’s heavy tilt toward short‑dated contracts, which they say are fueling excessive speculation, volatility, and retail investor losses.

At a recent event, SEBI whole‑time member Ananth Narayan emphasised that short‑term index options—especially expiry‑day trades—“increase market volatility and could lead to noise trading that may potentially undermine confidence in price formation,” even detracting from capital formation in India’s economy. He pointed out that such contracts create volatile spikes on expiry days, undermining clean price discovery and reducing the flow of investment into long‑term assets.

SEBI’s concerns are backed by sobering data. In the fiscal year 2024–25, a striking 91% of individual retail traders in futures and options lost money. On index‑option expiry days, turnover can soar to over 350 times that in the cash market, highlighting just how extreme short‑term activity has become. Narayan warned that “the current structure is not sustainable for any stakeholder”.

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In response, SEBI is weighing several key reforms:

• Extend F&O Contract Tenure: Officials suggest offering longer‑dated contracts to encourage more patient, strategic investment and discourage the dominance of ultra‑short trades, Securities and Exchange Board of India.
• Limit Expiry‑day Trading: SEBI has already imposed measures such as restricting weekly expiry options to fixed days (Tuesdays or Thursdays), increasing minimum lot sizes to Rs 15–20 lakh, and collecting options premiums upfront.
• Strengthening Monitoring and Limits: Open interest rules are being reshaped to align with cash market liquidity. Large positions in index options and single stock derivatives will face stricter surveillance.
• Investigate Market Manipulation: SEBI has barred U.S. firm Jane Street from Indian markets and frozen $567 million in assets, alleging manipulative trades that hurt retail investors.

These reforms form part of a broader effort to deepen India’s cash equity markets. Narayan reiterated the regulator’s goal of shifting emphasis from speculative derivatives to long‑term capital formation. He stressed that healthier F&O markets should enhance, not undermine, price discovery and investor confidence.

While these changes may compress F&O volumes, analysts noted a roughly 70% drop in daily index option activity after earlier curbs. SEBI maintains that the primary objective is to protect retail investors and promote long‑term growth.

Conclusion

SEBI’s multi‑pronged strategy—spanning longer‑tenured contracts, tighter expiry controls, enhanced risk monitoring, and market integrity enforcement—aims to rebalance India’s derivatives ecosystem. The regulator hopes these reforms will reduce volatility, curb speculative excess, and encourage a healthier alignment with India’s broader capital formation needs.