SEBI flags unhealthy imbalance: Expiry day index options turnover 350x cash market volumes

Markets regulator SEBI on Thursday flagged concerns over the growing dominance of expiry day index options trading, calling it an “obviously unhealthy” imbalance that could have several adverse consequences for market stability.

Speaking at the Confederation of Indian Industry’s Capital Markets Conclave, Ananth Narayan, Whole Time Member at the Securities and Exchange Board of India (SEBI), said that on expiry days, turnover in index options was often 350 times the turnover in the underlying cash market.

“Even today, very short-term derivatives dominate our equity derivative volumes,” Narayan said. “Research has suggested that expiry day option trading increases market volatility and could lead to noise trading that may potentially undermine confidence in price formation.”

SEBI’s own data showed that 91% of individual traders incurred net losses trading in futures and options (F&O) in FY25, with aggregate losses exceeding ₹1 lakh crore.

Narayan said this was a large sum that could have otherwise supported responsible investing and capital formation.

The regulator has introduced changes over the past year to curb speculative excesses, including regulatory tweaks in October 2024 and May 2025, which have shown early signs of moderating trading patterns.

However, Narayan emphasised that the issue warranted ongoing constructive debate.

“We must ask ourselves collectively – is all this at all sustainable?” he said.

“There is a win-win that we must co-create, where sustained capital formation is supported, while providing sustainable revenue streams for all stakeholders.”

India’s index options market has grown rapidly over the past five years, driven by retail traders lured by low premiums, high leverage, and weekly expiries that create sharp intraday moves. However, experts have warned that excessive short-term trading may distort price discovery and market depth.

“I would strongly endorse the view that towards this end, we must look for further ways to further deepen our cash equities markets, even as we look to improve the quality of our derivatives market by extending the tenure and maturity of the products and solutions on offer,” Narayan said.