93% of F&O traders lost big money! New SEBI report shocks investors

A staggering 93% of individual traders in India’s equity Futures and Options (F&O) market have incurred massive financial losses, according to a recently updated report from the Securities and Exchange Board of India (SEBI). The findings, covering the period from FY22 to FY24, show that retail traders have collectively lost an astounding ₹1.8 trillion over the three years. This revelation has reignited concerns about the accessibility of the F&O market to retail investors and the risks associated with this high-stakes financial segment.

In this period, the average loss per retail trader reached ₹2 lakh, while the top 3.5% of those affected saw losses soar to ₹28 lakh each. SEBI’s findings paint a grim picture of the market’s impact on individual investors, with only 7% managing to generate profits, and just 1% earning more than ₹1 lakh after deducting transaction costs.

Why retail investors are suffering

The majority of retail traders continue to engage in F&O trading despite their losses. SEBI noted that over 75% of those traders persisted in the market after consecutive losses, likely lured by the potential for high returns. Unfortunately, the allure of quick money has driven many inexperienced traders, particularly from smaller cities, into the F&O market without fully understanding the risks involved. SEBI’s data shows that traders from outside India’s top 30 cities made up over 72% of the F&O trading volume in FY24.

This surge in participation has been particularly prominent among younger investors. In FY24, nearly 43% of retail F&O traders were under 30, up from 31% in FY23. Most of these traders had an annual income of less than ₹5 lakh, raising further questions about their suitability for such high-risk trading.

Institutional vs retail traders

While retail investors faced significant losses, institutional players, including proprietary traders and foreign portfolio investors (FPIs), managed to profit. SEBI’s report highlighted that proprietary traders and FPIs generated ₹33,000 crore and ₹28,000 crore in gross trading profits, respectively, in FY24. A significant portion of these profits stemmed from algorithmic trading, where over 96% of proprietary profits and 97% of FPI profits were driven by sophisticated algorithms.

This sharp contrast between institutional and retail performance underscores the risks retail investors face in competing with entities that leverage advanced technology and market insights. Many retail traders not only face higher transaction costs but also lack access to the data and tools that larger entities use to maintain an edge in the market.

High transaction costs add to woes

Another major factor contributing to the losses of individual traders is the high transaction cost of F&O trading. The SEBI study found that the average retail trader spent ₹26,000 on transaction costs in FY24 alone. Over the three-year period, retail traders collectively paid ₹50,000 crore in transaction fees, with brokerage fees and exchange costs comprising the majority of these charges. These high costs significantly erode potential profits, making it even more difficult for individual investors to succeed.

Expert opinions: Is F&O trading too risky for retail investors?

Experts in the financial market have expressed concerns about the growing participation of retail investors in F&O trading, especially given the alarming loss rates. Many believe that SEBI should enforce stricter regulations to protect retail investors. Increased lot sizes and expiration rules are already being discussed, with SEBI potentially limiting the access of less-experienced traders to this volatile market.

One expert noted that retail investors often fail to recognise the risks associated with F&O trading. While institutional traders use complex algorithms to enhance profits, retail investors often operate without proper tools or knowledge, making them vulnerable to heavy losses. It is vital, they argue, for investors to educate themselves about the market before diving into such high-risk segments.

Future of retail participation in F&O

Given the staggering losses reported by SEBI, the future of retail participation in the F&O market is in question. SEBI is currently reviewing options to reduce retail exposure to F&O trading, which could include tighter restrictions on contract sizes or even measures to limit access for smaller, inexperienced investors. However, as the allure of quick profits continues to draw in traders, SEBI will likely need to balance protection with market freedom.