Hedge funds make billions as India’s options market goes ballistic

This quality has drawn attraction to India’s options market, which is staggeringly large. According to the Futures Industry Association (FIA), a commercialized body, the state accounted for 84% of each equity enactment contracts traded globally past year, up from 15% a decennary ago. The measurement of contracts past twelvemonth touched 85bn and has much than doubled each twelvemonth since 2020 (see chart). Most of the frenzy is focused connected the National Stock Exchange (NSE), which handles much than 93% of the transactions.

The options roar is propelled by the accelerated maturation of India’s stockmarket. In January it overtook Hong Kong’s to go the fourth-largest successful the world. The Nifty 50, NSE’s benchmark index, is hovering adjacent an all-time high. In 2019 the NSE had 30m registered retail investors. By March that fig had trebled.

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(The Economist)

Most trades impact equity-index options—a information that gives the holder the close to bargain an scale astatine a fixed price, called the “strike price", erstwhile the declaration expires astatine a aboriginal date. These are often utilized to spot bets connected the absorption of an scale for a tiny fee. If the onslaught terms for a bullish enactment is acold supra the existent scale level, the outgo of the option, called “the premium", is simply a tiny fraction of the worth of the index. If the scale climbs supra the onslaught by expiration, the stake pays off. Otherwise investors suffer the premium. Most Indian equity-index options are risky short-dated contracts of a week.

The swift emergence of India’s options marketplace has parallels with America’s meme-stock craze. Covid-19 spawned a procreation of Indian investors who turned to day-trading successful bid to flight boredom. This coincided with the rising popularity of apps, specified arsenic Groww and Zerodha, which made trading inexpensive and casual for tiny investors. For those with an appetite for speculative trades, choices are limited. Short-selling stocks—a mode to stake connected a falling stock price—is not casual successful Indian markets. High taxes and authorities scrutiny person deflated involvement successful cryptocurrency trading. That leaves equity options arsenic the lone outlet for those seeking speedy profits.

So-called finfluencers, social-media figures who beforehand options trading arsenic an casual mode to get rich, are pouring substance connected the fire. Many merchantability courses that thatch trading strategies. They flaunt luxury cars and extravagant houses successful bid to show their occurrence and pull customers. And the lure of an outsized pay-off tin beryllium hard to resist, particularly for newbies.

The Securities and Exchange Board of India, a regulator, estimates that 9 successful 10 retail investors suffer 125,000 rupees ($1,500) a twelvemonth connected average—equivalent to six months’ wage for a emblematic municipality Indian. It has warned astir the risks and is considering rules to clamp down connected unregistered fiscal advisers. In October it barred Mohammad Nasiruddin Ansari, a fashionable influencer connected societal media, from securities trading and ordered him to refund $2.1m successful lawsuit fees. Although trading platforms person besides tried to alert users to the risks by displaying warnings and offering tools that simulate marketplace movements, Nithin Kamath, caput of Zerodha, admits the connection “does not truly stick" until a idiosyncratic loses money.

More blase institutions basal to payment from the boom. Jane Street’s profits suggest that hedge funds and high-speed trading firms are doing good successful India’s low-value, high-volume market. Besides Jane Street, different trading houses, specified arsenic Citadel Securities, IMC and Tower Research, person been expanding successful India. The frenzy has besides enticed section funds that are competing with planetary firms.

A seasoned Indian broker points retired that exchanges, trading firms and the government, which pockets taxes connected enactment trades, payment from the boom. The mean retail investor, connected the different hand, is gambling “for a accidental to go Ambani", helium notes, referring to India’s richest man, Mukesh Ambani. The existent Mr Ambani is eyeing a antithetic way to stockmarket wealth. On April 15th Jio Financial Services, a spin-off from Reliance Industries, his conglomerate, announced a task with BlackRock, an American private-equity giant. The brace volition found a wealth-management and brokerage outfit. At slightest 1 Ambani is acceptable to nett from India’s thriving equity market.

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