Derivatives Volumes Fall As SEBI Serves Unpalatable Detox

India’s once-thriving derivatives market is facing a reckoning. Turnover has plunged sharply in recent months, and this downturn is no ordinary market correction. The root cause? A series of regulatory moves by the Securities and Exchange Board of India that has raised questions about the delicate balance between regulation and free-market efficiency.

Peak To Trough
In August 2024, India’s derivatives market reached an all-time high, with daily trading turnover soaring to ₹ 537 trillion. Liquidity was abundant, traders were active, and the derivatives segment—particularly options—was booming. 

SEBI then stepped in with a slew of measures aimed at curbing what it deemed excessive speculation. Though the regulator’s intent may have been to protect retail investors, the result has been a sharp contraction in volumes, a potential liquidity crisis, and growing unease among market participants.

Derivatives Regulated
SEBI has rolled out a series of market-shaping regulations, each tightening the noose on derivatives traders:
July 2024: Broker fees were decoupled from trading volumes, ending the ultra-low-cost trading model for discount brokers.
Impact: Death of the Discount Model
SEBI’s decision to delink broker fees from trading volumes effectively dismantled the high-frequency, low-margin trading model. Discount brokers, who built their businesses on this, were forced to impose per-trade fees. Retail traders—who thrive on tight spreads and frequent trades—were hit hard, immediately curbing activity.

October 2024: Weekly expiries were cut to just one per exchange, limiting trading opportunities and dampening volatility-driven speculation.
Impact: Killing the Volatility Game
Limiting weekly expiries to just one per exchange was a blow to short-term traders who relied on multiple expiries for strategic rollovers, risk management, and hedging. Volatility dropped, and with it, speculative interest—especially in indices like Nifty Bank, which saw a sharp reduction in liquidity.

December 2024: Extreme Loss Margins were raised, making leveraged trades more expensive and difficult to sustain.
Impact: The Cost of Leverage Skyrockets
Tighter margin norms forced traders to park more capital to maintain positions. The days of leveraging small funds for high returns dwindled, as upfront premium collection and increased ELM requirements made derivative trades capital-intensive. Many smaller traders simply exited.

December 2024: Extreme Loss Margins were raised, making leveraged trades more expensive and difficult to sustain.
Impact: A 44% Wipeout in Trading Volumes
SEBI’s measures have translated into a dramatic fall in derivatives turnover: Volumes have slipped from a peak of 
₹ 537.3 trillion in August 2024, to ₹442 trillion in October, ₹280.5 trillion in November and ₹280-298 trillion in December-January. That is a fall of 44% in volumes from the peak.

On the other hand, the cash market remained relatively stable, during the same period suggesting that SEBI’s crackdown impacted derivatives traders.

More Nails Coming
SEBI has proposed, in a discussion paper, redefining Market-Wide Position Limits, which will restrict position sizes. SEBI has proposed that the MWPL be set at 60 times the average daily delivery value of shares traded in the cash market replacing the current norm of 30 times. Or, it can be at 15% of the free float instead of the current 20%.

This move could further shrink derivative trading volumes, pushing large traders offshore or towards unregulated platforms.

What’s The Delta
SEBI also plans to introduce delta-based calculations for open interest, apparently aimed at getting a more accurate picture of market risk.

Critics, however, argue that this move could make trading unnecessarily complex, potentially stifling retail investor participation who may struggle to adapt to the new OI framework.

Apart from these moves, stricter intra-day position monitoring will come in adding another layer of surveillance from April, raising compliance costs.

Traders Could Move Offshore
The unintended consequence of SEBI’s regulations could be a flight of trading activity to offshore exchanges. Traders and institutions looking for greater flexibility may move to jurisdictions like Singapore and Dubai, where derivatives markets offer fewer restrictions, higher leverage, and deeper liquidity.

SEBI has to consider that regulations should be guardrails and not a regulatory overreach that could permanently damage liquidity.

The coming months will determine whether SEBI’s intervention was a necessary reset or an overreach. One thing is clear though: traders, brokers, and investors must adapt—or risk being left behind in SEBI’s evolving regulatory landscape.