Whalesbook
SEBI Tightens Rules
India's market regulator, SEBI, tightened rules to curb what was seen as excessive speculation in the options market. Measures like higher margin requirements and adjusted contract lot sizes made short-term options strategies much more costly and risky. This prompted many retail traders and proprietary desks to scale back their activity. Proprietary trading firms, which had been major players using derivatives liquidity, have noticeably reduced their algorithmic strategies in this more expensive environment.
Capital Flows to Cash Market
This shift has driven capital into the equity cash segment. With revenues from the more profitable F&O segment declining, brokers have aggressively promoted the Margin Trading Facility (MTF). MTF lets investors use leverage, buying shares with only a partial payment upfront while brokers fund the rest. This has become a key way to deploy capital, especially since individual stock performance often beat index movements between late 2024 and early 2026.
Brokerages Adapt Revenue Streams
This transition is changing how brokerages make money. As derivatives trading becomes less profitable due to regulations and higher costs, firms are shifting to MTF services and other equity-focused products. This aims to regain lost income and adapt to market changes driven by investor choices and regulatory oversight.
Future Regulatory Support for Cash Market
More regulatory changes are expected, which could further reinforce this market shift. SEBI is considering allowing more types of collateral for MTF, such as government securities, mutual fund units, sovereign gold bonds, REITs, and InvITs. Discussions are also happening about brokers raising capital via Non-Convertible Debentures to strengthen their MTF operations, showing a continued focus on building cash market infrastructure.
Loss of Global Derivatives Standing
However, this internal shift happens as India loses its position as the world's largest derivatives market by volume. The combined impact of transaction taxes, regulatory fees, and higher margins makes trading on Indian exchanges among the most expensive globally. This trend threatens long-term market growth and competitiveness, needing urgent attention from regulators and policymakers to prevent lasting harm.