How did SEBI’s targeting F&O froth hurt long-term stock investors?

As per SEBI’s circular dated 1st July 2024,¹ market infrastructure institutions (MIIs) (stock exchanges, depositary participants and clearing members) currently levy volume-based slab-wise charge structures, which the market regulator has asked to be uniform.

Why does it matter?

Ancillary transaction income – MIIs charge slab-wise fees from stockbrokers based on their turnover. This means the costs are lower if the stockbroker’s trading volume is high. The idea of offering this discount is to increase trading across various segments, including derivatives. However, brokers generally charge their customers at the highest prescribed slab rate. This results in the excess profit made by the broker. This rebate may account for 10-50% of revenue for some discount brokers.

Loss of incentive in the F&O market – As stockbrokers start charging uniform fees, a stockbroker will lose the incentive to generate massive turnover in the F&O market (India’s futures and options (F&O) turnover reached a record high of Rs 8,740 lakh crore ($1.1 trillion) in March 2024, which is a significant increase from Rs 217 lakh crore ($27 billion) in March 2019)²

Equity delivery charges – There is a possibility that some discount-broking companies may increase their charges for equity delivery, which is currently free of charge.

What next?

Slip in market prices of brokers – The share prices of significant brokers were hit after the release of the circular, as there was a substantial revenue loss.

Curb in household savings directed towards F&O – There may be a curb in the household savings getting parked towards F&O,³ which is the primary concern of SEBI.

Stick to a financial plan – It is essential to stick to your financial plan and asset allocation strategy to achieve your long-term goals.

Stay away from F&O – It is always best to stay away from the F&O segment. As per SEBI’s report published on 25th January 2023, 89% of investors⁴ lost money through these activities.

FOOTNOTES:

1. SEBI: charges levied by market infrastructure institutions – true to label – HTTPS://TINYURL.COM/28GT3JCY
2. ICICI Direct: India’s global turnover of F&O trading – HTTPS://TINYURL.COM/2XN8X8D4
3. Household savings going into speculation says SEBI chief, revises F&O selection norms –HTTPS://TINYURL.COM/2YEE6SYO
4. ET Wealth: Individual investors should avoid trading in the F&O segment as it’s clearly a loss-making proposition HTTPS://TINYURL.COM/28N25G86

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