Prop Desks Might Be Shutting Down Or Downsizing Due To SEBI Curbs In Derivates Market

Proprietary desk trading, also known as prop desk trading, is when a financial firm uses its capital to trade. Entities do this to raise funds for themselves. 

Last year, the Securities and Exchange Board of India came up with several provisions to curb volumes in derivates market, particularly to save the household wealth and retail investors from significant loss. These changes included higher margin requirements and reducing weekly indices, as now only two are available for weekly expiry.

The higher margin requirements have reduced leverage, squeezing profitability for many desks, while the removal of weekly expiry contracts has directly hit option sellers who relied on them for frequent premium income, as per Narinder Wadhwa, managing director and chief executive officer of SKI Capital.

Additionally, the lot sizes have increased by three times and the volumes have been impacted, as visioned by the regulator.

These factors have particularly affected Zero Day to Expiry (0DTE) strategies, leaving many option sellers without feasible approaches, leading to an estimated 20-30% overall impact on prop desks, according to a person familiar with the matter.

Proprietary desk trading, also known as prop desk trading, is when a financial firm uses its capital to trade. Entities do this to raise funds for themselves. 

Last year, the Securities and Exchange Board of India came up with several provisions to curb volumes in derivates market, particularly to save the household wealth and retail investors from significant loss. These changes included higher margin requirements and reducing weekly indices, as now only two are available for weekly expiry.

The higher margin requirements have reduced leverage, squeezing profitability for many desks, while the removal of weekly expiry contracts has directly hit option sellers who relied on them for frequent premium income, as per Narinder Wadhwa, managing director and chief executive officer of SKI Capital.

Additionally, the lot sizes have increased by three times and the volumes have been impacted, as visioned by the regulator.

These factors have particularly affected Zero Day to Expiry (0DTE) strategies, leaving many option sellers without feasible approaches, leading to an estimated 20-30% overall impact on prop desks, according to a person familiar with the matter.

Prop traders' reliance on high-frequency trades and short-term option strategies has left them particularly vulnerable in the new regulatory environment, Wadhwa said.

Arbitragers and expiry-based players have been hit hard, with many prop brokers surrendering colo racks at exchanges, according to a person in the know, who spoke on the condition of anonymity.

In simpler terms, arbitragers are those people who make profits by taking the advantage of price variations in the same or similar financial assets on different platforms.

Meanwhile, colo racks are also known as colocation racks and are those physical spaces that are used by the traders or firms in the exchange itself. This is done so that they can gain faster access to market data and information to execute trades without delay.

While quant-based HFT traders remain resilient, strategies reliant on stable volumes and controlled swings are struggling, NDTV Profit was told.

HFT traders are those engaged in high frequency trading. These individuals or firms are engaged in executing a very high number of trades at a very high speed. For this, they use mathematical models, algos and advanced computing.

Recently, we have noticed a significant shift from equity options to commodity options like gas and oil, as per Yashovardhan Khemka, senior manager, research and analytics at Abans Holdings.

The main reason behind this is the higher market volatility, which makes traditional strategies like "delta-long" (betting on a trend) less profitable, he said.

Option trading strategies are not always profitable because their success depends on how the market moves, its direction, and how volatile it is.

When fewer options are traded (declining volumes), the difference between the buying and selling price (spreads) often becomes larger. This can increase profit opportunities but only for certain strategies.