Derivatives trader base falls for first time in four years in FY26

Why in the News

The number of individual traders participating in the equity derivatives market fell 19% to 78.6 lakh in 2025-26 from 98.1 lakh a year earlier, according to data released by the Securities and Exchange Board of India (SEBI) on 20 August 2026. A smaller market has not turned into a safer one, since the average loss carried by each loss-making trader rose to its highest level since the analysis began.

What are equity derivatives?

1. About: Equity derivatives are contracts whose value is derived from an underlying share or share index, settled at or before a stated expiry date rather than by delivery of the underlying at the time of trade.
2. Futures and options: A futures contract obliges both sides to transact at an agreed price on expiry. An option gives the buyer the right without the obligation, in exchange for a premium paid upfront.
3. Why losses concentrate here: A small premium controls a large notional exposure, so a modest adverse price move can erase the entire amount committed.
4. Contract value: Each contract carries a minimum notional value fixed by the regulator, which sets the smallest position an individual can take.

What is the extreme loss margin?

1. About: The extreme loss margin is an additional margin collected over and above the standard margin, calibrated to cover losses outside the range that normal margining assumes.
2. How it was used here: SEBI increased the extreme loss margin for expiry-day trading by 2%, raising the cost of holding a position on the day price movement is sharpest.

What is a weekly expiry?

1. About: A weekly expiry is a contract that settles at the end of a given week rather than at the end of a month, which multiplies the number of short-dated, low-premium contracts available to trade.
2. How it was restricted: SEBI limited weekly expiries to one index per exchange, cutting the number of high-turnover expiry events in a week.

What do SEBI’s two studies show about participation and losses?

1. Participation: The individual trader base fell 19% to 78.6 lakh in 2025-26 from 98.1 lakh in 2024-25, the first fall in four years, against 42.74 lakh in 2021-22 when the analysis began.
2. Share of losing traders: The proportion of traders who incurred losses declined marginally to 87.7% in 2025-26 from 90.9% in 2024-25, the lowest level recorded since 2021-22.
3. Aggregate losses: Aggregate losses fell 18% year-on-year to Rs 91,685 crore in 2025-26, and still remained higher than the levels recorded between 2021-22 and 2023-24.
4. Loss per trader: The average loss per loss-making trader rose to Rs 1.16 lakh from Rs 1.13 lakh in 2024-25, the highest average loss recorded since 2021-22.
5. Who remains the largest cohort: Individual traders continued to account for the largest cohort in the derivatives market despite the decline in participation.
6. What the studies are: The two studies cover the profitability and the trading behaviour of individual derivatives traders, and were released on 20 August 2026 by SEBI’s Department of Economic and Policy Analysis II.

Why does a smaller trader base not amount to a safer market?

1. The averages moved in opposite directions: Aggregate losses fell 18% while the average loss per loss-making trader rose to a five-year high, so the burden concentrated rather than eased.
2. The improvement in the loss ratio is marginal: A fall from 90.9% to 87.7% still leaves close to nine in ten participants losing money.
3. The remaining participants are the more exposed ones: Those who stayed after the curbs are the traders willing to meet a higher minimum contract value and a higher expiry-day margin.
4. Aggregate losses are still above the pre-boom level: Even after an 18% decline, losses in 2025-26 exceeded the levels recorded between 2021-22 and 2023-24.

What explains the fall in participation?

1. Fewer weekly expiry events: SEBI limited weekly expiries to one index per exchange, removing several of the short-dated contracts that carried the highest retail turnover.
2. A higher entry ticket: The minimum contract value was raised to Rs 15 lakh to Rs 20 lakh, which prices out the smallest participants.
3. A costlier expiry day: The extreme loss margin for expiry-day trading was increased by 2%, raising the capital required to hold the most volatile positions.
4. The regulator’s own caveat: SEBI cautioned against attributing the decline entirely to the regulatory measures, stating that participation had already begun moderating before their implementation.

What does the persistence data reveal about trader behaviour?

1. Losses do not by themselves deter continuation: The second study found that incurring losses did not necessarily discourage traders from continuing to participate in derivatives.
2. Persistence weakened this year: Only about 57% of the traders who formed the 2024-25 cohort continued trading in 2025-26, against a long-term average of around 65%.
3. Nearly half stopped: 43% of that cohort stopped trading during the year.
4. Experience does not improve outcomes: In 2023-24, 91.6% of traders who had reported losses in both 2021-22 and 2022-23 also reported losses in 2023-24.
5. The probability holds across the experience range: The probability of making losses remained above 90% across traders with one to five years of experience.

What challenges does retail investor protection in the derivatives market face?

1. Curbs raise the entry price without changing the odds: A higher minimum contract value screens out small participants rather than improving the outcomes of those who remain. Eg. The probability of making losses stayed above 90% across traders with one to five years of experience.
2. Losses do not teach: Repeated loss-making does not reliably drive exit, so a behavioural remedy cannot be assumed. Eg. 91.6% of traders who lost money in both 2021-22 and 2022-23 lost money again in 2023-24.
3. Unregistered advisers and finfluencers: Trading advice reaches retail participants through channels outside the registered investment adviser framework. Eg. SEBI has issued repeated orders against unregistered persons offering stock recommendations on social media platforms.
4. Migration to unregulated venues: Tightening a regulated segment can push activity to opaque alternatives rather than out of speculation altogether. Eg. SEBI and the Reserve Bank of India have repeatedly warned against unauthorised electronic trading platforms offering leveraged contracts.
5. Exchange revenue tied to the volumes being curbed: Transaction charges and the derivatives segment are a significant part of exchange income, which creates a tension with tighter product rules. Eg. Weekly index expiries generated the highest turnover days on Indian exchanges before being limited to one index per exchange.
6. Investor grievance redress capacity: Losses from a legitimate but unsuitable product are not a grievance, so the redress machinery does not reach the harm being measured. Eg. Aggregate losses of Rs 91,685 crore in 2025-26 arose from lawful transactions on regulated exchanges.
7. Measurement lag on a fast-moving market: Behaviour is analysed a full financial year after it occurs, so remedies address a market that has already changed. Eg. The studies released in August 2026 report on the year ended March 2026.

“[2025] Consider the following statements:

I. India accounts for a very large portion of all equity option contracts traded globally, thus exhibiting a great boom.

II. India’s stock market has grown rapidly in the recent past, even overtaking Hong Kong’s at some point in time.

III. There is no regulatory body either to warn small investors about the risks of options trading or to act on unregistered financial advisors in this regard.

Which of the statements given above are correct?

(a) I and II only

(b) II and III only

(c) I and III only

(d) I, II and III