Rise in options trading from small cities..

Interesting article on the topic.

SEBI is seeing trends of rise in option trading in small cities. As expected, it is worried:

The Securities and Exchange Board of India (Sebi) is getting uneasy about the rise in trade by investors from smaller centres. Lured by the possibility of high returns, investors from the retail category in smaller towns and cities have been increasing their exposure to these options since the beginning of the year.

The regulator said the low levels of financial literacy and investor awareness was the main reason for rise in retail participation in the derivatives segment. “In smaller centres, people have started trading in index options, which is not suitable for them. They are being encouraged even though they don’t have much knowledge about these products. They are being lured by the gains,” said Rajeev Kumar Agarwal, whole-time member, Sebi, at a financial literacy seminar.

Average monthly trading turnover in index options in November stood at 84 per cent of the total trades in the market, up from 77 per cent in January.
Since Nifty margins at this point are lower than stock margins, options writing is becoming much more popular among retail and high net worth investors (HNI). Earlier, options writing was largely done by savvy HNIs or foreign institutional investors, who understood this segment quite well,” said the head of derivatives of a domestic brokerage, who did not wish to be named.

The rise in trading in index options indicates a rise in speculation in the market, ill-advised for retail investors who should be looking at long-term investing, sector officials said.

Market intermediaries in smaller town’s and cities have been known to be encouraging new investors to explore this route to advance their businesses. Concerned by this trend, the regulator has boosted its investor awareness initiatives, with a particular focus in smaller centres, where the practice of misleading investors is more rampant. Regional offices of  have a dedicated classroom where such investor education programmes are routinely held, said Agarwal .

“Not just the investors, but the intermediaries also need to be educated. We need to tackle the issue of financial ignorance from all sides to end such malpractices,” said Agarwal.

One would have ideally liked to see rise in small businesses and so on from small centres. But we are seeing small investors getting into things like options trading. Plain irrational exuberance.
Rational school would say why should a regulator worry? Let people decide what they wish to do. We keep talking of a retail market which should be as diversified as possible. Retail investors should be encouraged as much as possible. But not the same for futures and options market. And who said spot market is all for long term investing. Seeing the growth in daily volumes over the years, it is all short term speculation. Actually it is futures market which is more long term as you wait for some futuristic conditions to pan out. The point is stock markets are risky whatever the duration of the market.
This does not mean the post is encouraging small investors to get into options trading. It is just that there are policy dilemmas. Should the regulator let people take risks and figure things themselves. Or should it intervene and mitigate risks?
Economists talk of several tools which central banks should have to mitigate risks related to banking system. But what tools do capital market regulators have? Restrict trading is one such tool but with markets this crazy people will figure ways to enter. Literacy is another but is usually ignored during such times.
We need more discussion on this…
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