The Struggles of India's Retail F&O Traders

The latest findings of the Securities Exchange Board of India (SEBI) shows that between FY22 and FY24, ₹1.13 crore unique individual traders incurred a total net loss of ₹1.81 lakh crore in future and option trading, including transaction costs. Why did this happen? The report examines the fine print and also shares tips on how to minimise losses and maximise returns in this category 

In April 2024, the Indian derivatives market found itself at the heart of an international storm when a court case between two U.S. financial giants unexpectedly shed light on a billion-dollar secret. Jane Street Group, a prominent U.S. hedge fund, had been quietly profiting from a highly lucrative trading strategy deployed in India’s markets. But all of that came crashing into the open when Jane Street Group filed a lawsuit against rival Millenium Management, accusing them of stealing this proprietary strategy 

As the courtroom drama unfolded in New York, India’s role in the strategy was inadvertently revealed. The secret was out: the high-stakes, high-speed world of Indian derivatives trading was a cash cow for the few in the know. What began as a typical corporate spat soon unravelled into something far more sinister, exposing the ruthless machinery of momentum-driven trading in India. And while these companies battled for a billion-dollar prize, it became evident that everyday retail traders in India were the ones losing out. 

The latest findings of the Securities Exchange Board of India (SEBI) shows that between FY22 and FY24, 1.13 crore unique individual traders incurred a total net loss of ₹1.81 lakh crore in future and option trading, including transaction costs. In FY24 alone, individual traders faced net losses of ₹75,000 crore. Over this three-year period, more than 1 crore traders (92.8 per cent of all individual traders) lost money—an average of ₹2,00,000 each—while the sharks circled, reaping unimaginable profits. 

India had become a playground for global financial giants, leaving small traders to fight for scraps in a game they didn’t even know they were playing. 

Key Findings of the Report
Before delving deep into the details of the report, we need to know the main players in the future and option market and who all are included in that. There are four primary participants in this market. They are: 

1. Retail Investors: Individual investors, including highnet-worth individuals (HNIs), who trade on their own behalf. Family offices, which manage wealth for ultrawealthy individuals or families, often fall under this category.
2. Foreign Institutional Investors (FIIs): Large institutional investors based outside India, such as hedge funds, pension funds and sovereign wealth funds, which invest significant amounts of capital in the Indian markets.
3. Domestic Institutional Investors (DIIs): India-based institutions like mutual funds, insurance companies and pension funds that manage domestic capital and invest in future and option markets.
4. Proprietary Trading Desks: Trading desks within brokerage firms, financial institutions, or even corporations, trading the firm’s own capital to make profits.
5. Others: This category primarily includes corporates, trusts, NRIs and portfolio management services (PMS) clients, who may participate in the future and option market for hedging, speculative, or investment purposes. Family offices typically fall under the retail category unless they operate at an institutional level. 

Futures Shine Brighter While Options Falter for Retail Traders 

In FY24, proprietary traders emerged as the top earners in the equity future and option segment on the NSE, raking in an impressive ₹33,000 crore in gross profits (profits before accounting for transaction costs). Foreign portfolio investors (FPIs) followed closely, amassing ₹28,000 crore. Meanwhile, domestic institutional investors (DIIs) earned a relatively modest gross profit of around ₹200 crore. On the flip side, the individual trader category suffered the most significant losses. 

This category recorded a staggering ₹41,500 crore in gross losses. The ‘others’ category—comprising corporates, trusts, NRIs and PMS clients—also saw notable losses, amounting to ₹19,700 crore. A closer look reveals a stark contrast in the profit and loss patterns for individual traders between futures and options trading. While individuals faced a massive loss of ₹55,000 crore in options during FY24, they made a positive turnaround in futures trading, earning gross profits of around ₹13,400 crore. 

The data presented alongside offers valuable insights into the profitability trends across different categories of traders in India’s equity derivatives market, highlighting the challenges faced by retail traders, particularly in the options segment, from FY22 to FY24. Following are the other highlights of the report: 

1. High Losses among Individual Traders

• 91.1 per cent of individual traders incurred losses in FY24, with an average loss of Rs1.2 lakh per person.
• During FY22-FY24, about 1.13 crore unique individual traders experienced a net loss of ₹1.81 lakh crore.
• Only 7.2 per cent of individual traders made profits, and less than 1 per cent earned over ₹1 lakh in profits. 
  
  Futures & Options Trading: B30 Cities Lead, But Risks Loom 

Geographic Spread



Trading Behaviour Losses and Per Capita Impact The geographic distribution of Futures and Options (F&O) traders has shifted notably toward B30 cities, with 72.2 per cent of traders from these areas in FY24, compared to 61.7 per cent of mutual fund (MF) investors. While F&O traders from B30 cities contributed 51.3 per cent of the total turnover, they accounted for 68.1 per cent of the losses, indicating higher risk exposure relative to MF investors. The ratio of F&O traders to MF investors is also greater in B30 cities than in T30 cities. 

In FY24, 23.5 per cent of F&O traders came from Tier I cities, contributing 36.8 per cent to turnover but only 26.2 per cent to losses. Maharashtra, Gujarat, Uttar Pradesh, and Rajasthan made up over 50 per cent of all F&O traders, with Uttar Pradesh seeing a 186 per cent rise in traders between FY22 and FY24. The highest per-person losses were reported in southern states like Telangana, Andhra Pradesh and Tamil Nadu. 

Trading Behaviour 

Despite consistent losses, many traders persist in derivatives trading. In FY24, 76.3 per cent of traders who incurred losses in FY22 and FY23 continued trading, with only 8.3 per cent achieving profitability. This persistence suggests a potential lack of awareness or overconfidence among retail traders regarding the risks of derivatives. 

Losses were significant, with per-person losses averaging ₹96,800 in Tier I cities and around ₹90,000 in Tier II and III. Southern states like Telangana and Andhra Pradesh saw the highest per-person losses, highlighting the need for improved risk management and investor education. 

Losses and Per Capita Impact 

Per-person losses in Tier I, II, and III cities were significantly high, averaging ₹96,800 in Tier I cities and around ₹90,000 in Tier II and III. Traders in Tier I cities had larger turnovers but lower per capita losses, indicating better risk management. In contrast, South Indian states experienced the highest average losses per person, with Telangana leading at ₹1.97 lakh and Andhra Pradesh following at ₹1.45 lakh. These figures highlight the need for improved financial awareness and risk management strategies, especially in regions with higher loss rates. 

This denotes an increasing trend of retail participation in high-risk equity derivatives from non-metro areas. Significant financial losses in these regions emphasize the need for enhanced investor education and improved risk management practices. In contrast, Tier I cities show higher turnover and lower per capita losses, suggesting a more structured and cautious approach to derivative trading. This disparity underscores the importance of targeted educational initiatives to better equip traders, especially in non-metropolitan regions, with essential risk management skills. 

2. Algorithmic Trading Dominance

• Most of the profits were made by FPIs and proprietary traders, with 97 per cent of FPI profits coming from algorithmic trading.
• In contrast, only 13 per cent of individual traders used algorithms, and these were often used for forced liquidations. 
   

3. Product Preference

• 99.3 per cent of future and option traders traded options at least once, while the percentage of trading futures dropped from 10.6 per cent in FY22 to 5.9 per cent in FY24.
• Traders incurred higher losses in options (91.5 per cent of traders) compared to futures (60 per cent of traders). 
   

4. Demographic Insights

• Younger traders (less than 30 years) were more prone to losses, with 93 per cent experiencing net losses.
• A majority of traders (76 per cent) declared an annual income below ₹5 lakh, with 92.2 per cent of this group making losses.
• Female traders made up 13.7 per cent of the participants in FY24, with a lower percentage incurring losses compared to male traders (86.3 per cent as against 91.9 per cent). 

5. Persistence despite Losses

• Over 75 per cent of loss-making traders continued trading even after incurring losses for two consecutive years. 
   

6. Transaction Costs
Individual traders spent over ₹50,000 crore in transaction costs from FY22 to FY24, with most of the costs going toward brokerage fees. 

Strategy for Retail Investors to Minimise Future and Option Losses and Optimise Returns 

• Focus on Risk Management: Given the high percentage of individual traders incurring losses (91.1 per cent), retail investors should prioritise risk management strategies such as setting stop losses and limiting their exposure to high-risk trades. Moreover, they should be using different options strategy that has defined risk such as ‘bull call spread’ or ‘put call spread’, among others. n
• Consider Futures over Options: The given data shows that fewer traders incur losses in futures (60 per cent) compared to options (91.5 per cent). Retail investors might benefit from focusing on futures trading, where risk can be managed more predictably.
• Limit Transaction Costs: Transaction costs, especially brokerage fees, make up a significant portion of losses. Investors should aim to minimise these by choosing brokers with lower fees and avoiding excessive trading.
• Avoid High Leverage: High-value traders tend to suffer more losses, with 95 per cent of them losing money. Retail investors should avoid over-leveraging their positions, which can magnify losses.
• Avoid Frequent Trading: Higher trading activity correlates with higher losses. Retail investors should avoid speculative frequent trading, particularly in options, and focus on fewer, more well-researched trades. 

By adopting these strategies, retail investors can potentially minimise their losses and optimise returns in the future and option segment. If possible, explore algorithmic trading or tools that allow for better trade execution and risk management as it is a significant contributor to profits for FPIs and proprietary traders. 

Conclusion
The contentious legal battle not only highlights the cut-throat nature of high-frequency trading but also raises concerns about the impact on retail investors. With retail investors constituting a significant portion of option trades in India, concerns have been raised about the potential exploitation of unsophisticated traders by sophisticated market makers. This clearly calls opens up a need for regulatory scrutiny and investor education in India’s derivatives market.