F&O Traders’ Losses and Gains: A SEBI Study Analysis (FY22-FY24)

F&O Traders’ Losses and Gains: A SEBI Study Analysis (FY22-FY24)

Sub: Eco

Sec: Capital Market

• SEBI Study Findings:
  • A SEBI study revealed that futures and options (F&O) traders in India lost a staggering ₹1.81 lakh crore during the period FY22-FY24.
  • In FY24 alone, individual traders incurred a loss of about ₹75,000 crore.
• Losses Among Individual Traders:
  • Over 91% of individual F&O traders lost money in FY24, affecting 73 lakh traders in India.
  • A notable 43% of F&O traders were under the age of 30 in FY24, up from 31% in FY23, and 93% of them experienced losses, higher than the overall share of 91%.
• Persistence Despite Losses:
  • About 75% of the individuals who lost money continued trading in the markets, even after incurring losses for two consecutive years.
• Income Profile of Traders:
  • A significant portion of traders, three-fourths, reported an annual income of less than ₹5 lakh.
• Contrasting Gains for Proprietary Traders and FPIs:
  • Unlike individual traders, proprietary traders and foreign portfolio investors (FPIs) made significant profits.
• Proprietary traders earned a gross profit of ₹33,000 crore in FY24.
• FPIs also made ₹28,000 crore during the same period.
  • Most of the profits for these entities came from “algo entities” — entities that use algorithm-based trading systems.
• Key Implications:
  • The study highlights a stark contrast between the losses incurred by individual F&O traders and the profits made by proprietary traders and FPIs, underlining the growing role of algorithmic trading in determining market outcomes.

Futures and Options (F&O)

Futures and Options are derivative contracts used in stock markets:

• Futures: An agreement to buy/sell an asset at a future date for a pre-determined price.
• Options: A contract that gives the holder the right, but not the obligation, to buy/sell an asset at a set price before a certain date.

Algorithmic Trading (Algo Trading):

• Algo trading refers to using algorithms to execute trades automatically based on predefined criteria like price, volume, or timing.
• Speed: It allows for superfast order generation, often faster than human traders, leading to significant gains from even millisecond advantages.
• Data Analysis: Algorithms analyze vast amounts of data and execute orders without human intervention.
• Error Minimization: It reduces human error and makes trading decisions based on data patterns.
• SEBI Regulation: In India, the Securities and Exchange Board of India (SEBI) regulates algo trading to ensure transparency and manage risks.
• Advantages: Increased speed, more trades per second, and automation allow traders to capitalize on small market inefficiencies.
• Execution: Orders are executed within seconds, preventing significant price changes and giving traders better control over transactions.