SEBI's F&O Crackdown Spooks Markets: Angel One, BSE, CDSL See Sharp Sell-Off

Stocks of key market intermediaries — BSE, Angel One, and CDSL — slid sharply following reports that SEBI is preparing to enforce tighter linkage rules between derivatives and cash-market positions. BSE dropped by more than 7.5%, Angel One fell by nearly 6%, and CDSL retreated by around 3% as investor sentiment soured due to structural concerns.

This comes on the back of SEBI's crackdown on Jane Street, a U.S.-based quant trading firm recently barred from Indian markets for alleged expiry-day index manipulation. Now, SEBI appears set to expand its agenda by addressing systemic weaknesses in the derivatives ecosystem.

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What's Behind SEBI's Proposal?

SEBI's idea is straightforward but significant: cap derivatives positions based on cash-market liquidity. In a February consultation, the regulator floated a market-wide position limit formula — the lower of 15% of a stock's free-float market cap or 60 times its average daily delivery volume.

In essence, this would prevent traders from building outsized F&O positions without a credible underlying equity footprint. The move aligns with broader proposals—such as requiring index derivatives only on diversified indices and adding pre-open sessions to futures — intended to tighten market oversight.

Why Market-Linked Position Limits Matter

Picture this: a trader accumulates massive futures or options bets on a stock circuitously connected to actual demand in the cash market. Such activity—if unchecked—can distort prices, inflate volatility, and undermine fair price discovery.

For high-frequency firms or hedge funds, that's a tempting loophole. But regulators now view it as a vulnerability. SEBI Chairman Tuhin Pandey recently stated that India leads the world in equity derivatives volume—nearly 60% of global activity—and requires sharper surveillance mechanisms to keep pace.

The Market's Nervous Reaction

For listed players tied to capital markets infrastructure, the news signalled risk. BSE, Angel One, and CDSL — which serve as the plumbing for trading and clearing — were hit hard, wiping out billions in market cap over a single session.

Adding to the pressure was Nuvama Wealth, whose link to Jane Street sparked an 11% plunge in its shares after the regulator's actions triggered a sell-off in intermediary stocks.

Implications for Traders and Investors

1. Margin and Positioning Shake-Up: Tying derivatives to cash-market eligibility will impact how brokers deploy leverage and risk-weight F&O trades. For clients, margin calls may increase, and portfolio adjustments may be necessary.
2. Volatility-Driven Trading Gets Sharper: Structurally tighter rules might reduce directional bets, but they could push speculative volume into more liquid instruments, such as index futures or pair trades.
3. Long-Term Market Quality Gains: Critically, though it may hurt volumes in the short run, these steps are part of a broader commitment to market integrity—following SEBI's decisive handling of the Jane Street case.

What Separates SEBI's Current Push from Past Moves?

This isn't SEBI's first attempt at tightening F&O norms. In October 2024, the regulator raised margins and barriers for derivatives traders; earlier, it also introduced position limits and caps on ODI transactions by offshore entities.

However, the current proposals take it a step further. By linking derivatives volume to actual underlying holdings in cash markets — plus enforcing non-benchmark index conditions and suggesting futures pre-open sessions — SEBI intends to neutralise structural imbalances and limit misuse.

What's Next?

SEBI's proposals remain at the feedback stage, with comments invited. The consultation aims at a phased roll-out, giving brokers and market participants time to recalibrate operations and systems.

In the future, market watchers will be assessing:

• Whether position-linked caps are enforceable in practice
• How quickly SEBI aligns exchange infrastructure (like pre-open sessions)
• The effect on trading volumes, liquidity, and broker profitability

Bottom Line

SEBI is charting a transformational course for the Indian derivatives market—beyond the headline fix of banning rogue players. By structurally linking derivatives to cash-market participation, the regulator is signalling that scale must align with substance.

For brokers and clients, that shift means recalibration. Short-term pain in volumes and margins is likely. However, if implemented effectively, the measures could deliver a cleaner, fairer, and more resilient F&O ecosystem — and mark a turning point for India's claim to be the global derivatives leader.