SEBI's Risk-Based Assessment Of Clients May Hurt NSE Revenue

The market regulator's move to ensure that participants like stockbrokers require documentary evidence of the financial capability of clients is likely to impact the revenue of the country's largest stock exchange—the National Stock Exchange Ltd.

While the Securities and Exchange Board of India categorically denied curbing retail participation in the futures and options segment, it is evaluating whether the May 17 master circular can be used to assess clients based on risk.

SEBI's move is aimed at deterring retail investors from taking risky derivative bets. That's because, according to a survey by the regulator, nine of 10 individual traders lost money in the F&O market from FY19 to FY22.

The effort to protect investors, however, will hurt the volume and revenue of the NSE as, according to its first quarter earnings call, the bourse gets nearly 82% of its transaction charges from options trading, 9% from futures, and around 9% from equity cash markets.

Derivatives Drive NSE's Financials

A drop in derivatives volume directly impacts NSE's financials.

Its F&O volume declined 8% sequentially during the quarter, even as it rose 18% for the cash market. Revenue from futures declined, while revenue from options rose despite a fall.

In June, the average daily turnover in the equity derivatives segment declined 3.2% month-on-month, while it rose 7.6% over a year earlier to Rs 1,56,500 crore.

The NSE took a 6% cut in transaction charges after an increase in the Securities Transaction Tax. It has a slab-based transaction charge for options trading, with a lower transaction charge as the volume of trade increases, the exchange said in the earnings call.

The government is also trying to disincentivise retail participation in the F&O segment. In this year's budget, the government hiked the Securities Transaction Tax on equity derivatives, said Ashishkumar Chauhan, managing director and chief executive officer of NSE, during the earnings call.

The move by SEBI to make brokers responsible for client trading based on risk-based assessments is likely to bring down speculation and trading volume.

It needs to be seen what kind of additional regulations would come in for the derivatives segment, said Chauhan.

NSE also clarified that it is in consultation with market participants to extend trading hours, though a decision has yet to be made. It plans to open trading in the evening for investors who would like to participate after office hours. To begin with, trading will be available for some of the derivatives contracts, said Chauhan during the earnings call.

To be clear, trading interest peaked during the pandemic as investors working from home participated in equity markets, and this tapered off as work from the office resumed.

Rising Retail Investors

Retail investors participating in the NSE's cash markets rose from 3 million in January 2020 to nearly 12 million in January 2022, only to fall to 6.7 million by April 2023. Since then, it rose for a second consecutive month to a six-month high of 8.9 million by June 2023.

According to the NSE, despite the drop in 2022 and 2023, the number of active investors trading in secondary markets continued to remain well above the pre-pandemic level.

Retail participation surged 500% from FY19 to FY22 in the equity derivatives segment, and the number of retail investors remained at around 3.4 million in June 2023, marginally higher than the monthly average of 2.8 million during FY23.