SEBI Study Reveals 93% of Individual F&O Traders Faced Losses Between FY22 and FY24

A recent study conducted by the Securities and Exchange Board of India (SEBI) has revealed that nearly 93% of individual traders participating in the futures and options (F&O) market faced significant financial losses over the past three fiscal years, spanning from FY22 to FY24. The analysis covered over 1 crore investors, with most experiencing average losses of approximately Rs 2 lakh each.

Key Highlights of the Study:

• Aggregate Losses: Individual traders in the F&O market collectively suffered Rs 1.8 lakh crore in total losses during the period.
• Loss Concentration: Among the worst-hit traders, the top 3.5% (approximately 4 lakh traders) faced an average loss of Rs 28 lakh each, including transaction costs.
• Minority Gained: Only 1% of individual traders managed to secure profits exceeding Rs 1 lakh, even after factoring in transaction costs.

This report follows a similar SEBI study published in January 2023, which indicated that 89% of individual equity F&O traders had incurred losses in FY22. The updated analysis expands on this by examining three fiscal years and providing a more comprehensive view of individual traders' profit and loss patterns.

Insights from the SEBI Report

The study shows a clear disparity between individual and institutional traders. While individual traders struggled to turn profits, proprietary traders and foreign portfolio investors (FPIs) saw notable gains. Specifically, proprietary traders earned Rs 33,000 crore in gross trading profits, and FPIs made Rs 28,000 crore in FY24, before transaction costs.

Interestingly, 97% of FPI profits and 96% of proprietary trading gains were attributed to algorithmic trading, highlighting the dominance of technology-driven strategies in profit generation. This contrasts sharply with the results of individual traders, who spent an average of Rs 26,000 per person on transaction costs in FY24. Over the three years, individuals collectively spent around Rs 50,000 crore on transaction fees, with brokerage charges accounting for 51% of these costs and exchange fees representing 20%.

Trading Patterns and Demographics

The SEBI study also sheds light on the changing demographic patterns in the F&O market:

• Increased Youth Participation: The proportion of young traders (below 30 years) surged from 31% in FY23 to 43% in FY24.
• Geographical Shifts: Traders from Beyond Top 30 (B30) cities made up 72.2% of the total F&O trader base, surpassing the percentage of mutual fund investors (61.7%) from these regions.

Despite the high rate of losses, more than 75% of individual traders continued to trade in F&O markets across consecutive years. This persistence in trading, despite repeated financial setbacks, indicates either a strong belief in potential gains or a lack of understanding of the risks involved.

Income and Financial Profiles

The study also examined the income profiles of F&O traders. Notably:

• Over 75% of traders declared annual incomes of less than Rs 5 lakh in FY24, yet they actively participated in high-risk, high-cost F&O trading.
• The distribution of losses and costs disproportionately affected lower-income traders, raising concerns about the financial literacy and risk management practices of these individuals.

Broader Implications

The findings of this study are significant, particularly as the F&O market has seen an influx of individual participants in recent years. The results highlight the substantial financial risks associated with trading in F&O markets for individual investors, especially those with limited resources and knowledge.

While institutional traders, often equipped with sophisticated algorithms and strategies, continue to profit, the vast majority of individual traders face considerable losses, raising questions about market fairness, accessibility, and the adequacy of investor protection mechanisms.

This report serves as a reminder for individual investors to exercise caution, consider their financial capacities, and seek professional advice before engaging in F&O trading.

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Demat Accounts Surge: Over 42 Lakh Additions in June, Total Exceeds 16 Crore

In June 2024, India witnessed a significant surge in the opening of demat accounts, with over 42.4 lakh new accounts added. This represents the highest growth rate since February 2024, surpassing the previous month's addition of 36 lakh and significantly higher than the 23.6 lakh accounts opened in the same month last year. This marks the fourth time in recent months that new demat account additions have crossed the 40 lakh mark, a milestone previously achieved in December 2023, January 2024, and February 2024.

With these new additions, the total number of demat accounts now stands at over 16.2 crore, reflecting a 4.24% increase from the previous month and a 34.66% rise compared to last year. This sharp rise in account openings is attributed to a stable market, bolstered by strong foreign investor activity and a growing sense of confidence in the newly formed government.

Market analysts suggest that the current bullish sentiment in Indian equities, characterized by continued foreign investments and strong returns, has played a key role in driving the surge in demat accounts. The lack of market corrections has further fueled investor interest, as many new participants fear missing out on profitable opportunities. Additionally, ongoing IPOs, many of which have been heavily subscribed and are listing at premiums, have drawn fresh interest from retail investors.

As tax-filing season approaches, more individuals are looking to diversify their investments into equity markets, with the hope of increasing returns and reducing tax liabilities. Brokerages have also intensified their campaigns to promote financial inclusion, encouraging more people to enter the markets. According to Rajesh Palvia, an analyst at Axis Securities, the Nifty index is expected to reach 25,000 by the Budget period, with a year-end target of 28,000, further fueling optimism.

However, analysts caution that not all of the new accounts represent entirely new investors. Some are individuals shifting between brokers or opening multiple accounts to take advantage of different offers. A portion of the accounts could also be duplicates. Despite this, the momentum shows no signs of slowing down, and as long as markets perform well, the pace of demat account openings is expected to continue rising.

Deepak Jasani, an analyst at HDFC Securities, points out that the surge in demat accounts is a reflection of the broader market trend, with both retail and institutional investors showing increasing confidence in India's equity markets. As market sentiment remains positive, the influx of new accounts is likely to continue throughout the year.

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Markets Await Powell's Decision: Will He Follow Greenspan's Playbook to Avoid Recession?

With bonds and stocks rallying ahead of a crucial Federal Reserve meeting, traders are drawing parallels to the 1995 era when Alan Greenspan successfully navigated a soft landing for the U.S. economy. The focus now is on whether Fed Chair Jerome Powell will opt for a 25 or 50 basis point rate cut, and how it will impact the economy.

Historical data shows that during past Fed easing cycles, including the six analyzed since 1989, the S&P 500 Index, Treasuries, and gold typically rise when the Fed begins to lower rates. Traders are looking back at 1995 for guidance, a year when the Fed managed to reduce rates without triggering an economic downturn.

Kristina Hooper, Chief Global Market Strategist at Invesco, believes the U.S. economy is on track to dodge a recession with the Fed's anticipated policy shift. "Once the Fed starts cutting rates, there will be a positive psychological effect that will support the market," she said.

The S&P 500 Index has historically gained an average of 13% in the six months following the first rate cut, except during the recessionary years of 2001 and 2007. Additionally, short-term Treasuries have usually outperformed long-term notes during these cycles, leading to a steeper yield curve. Gold has also delivered returns in four of the past six easing cycles, while the performance of the dollar and oil has been mixed.

As the Fed prepares to implement rate cuts, uncertainty looms with the upcoming presidential election. Candidates have starkly different economic policies, which could significantly affect global markets based on election outcomes and Congressional votes.

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International, has downgraded his rating of U.S. equities to neutral from overweight due to election risks. "The most likely scenario is a soft landing, but elections could introduce unique challenges," he noted.

In the 1995 easing cycle, Greenspan and the Fed managed to lower rates from 6% to 5.25% within six months, cooling the economy without causing a downturn. This time, with the Fed's target range at 5.25% to 5.5% for 14 months, bond traders are pricing in over 2 percentage points of easing over the next year. The S&P 500 is nearing an all-time high, and credit spreads are at historical lows.

Investor optimism for a soft landing is supported by strong corporate and household balance sheets, with record-high corporate profits and household wealth. "Inflation is no longer the primary concern; it's high interest rates," said Yung-Yu Ma, Chief Investment Officer at BMO Wealth Management. "By cutting rates now, the Fed may address this issue and prevent a downturn."

Bloomberg strategists suggest that Treasury bonds typically rally at the onset of a Fed easing cycle, particularly when it coincides with a weakening economy. However, in a soft landing scenario, bond performance may lag behind stocks.

Recent data shows a rotation into utilities and real estate sectors, which historically benefit from rate cuts if economic growth remains robust.

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