Sebi's options move raises market fears

Brokers, proprietary desks and institutional traders are fretting over a recent regulatory proposal that they fear will reduce liquidity and raise trading costs in India's derivatives market.

- Ram Sahgal & Neha Joshi

Brokers, proprietary desks and institutional traders are fretting over a recent regulatory proposal that they fear will reduce liquidity and raise trading costs in India's derivatives market. They believe such a practice is unprecedented globally and want it scrapped.

The Securities and Exchange Board of India (Sebi) has proposed to change the way of calculating open interest (OI) and imposed a new gross limit for index options. Open interest refers to the outstanding or open derivatives positions of all participants. Sebi believes the move will help curb manipulation in individual stocks and accurately reflect risks in index options.

According to three brokers Mint spoke with, the new gross limit will reduce liquidity and widen bid-ask spreads, raising the cost of executing a trade. The bid-ask spread is the difference between the highest price a buyer is willing to pay (the bid price) and the lowest price a seller is willing to accept (the ask price). The likely loss of liquidity by Sebi's proposal could make it costlier for clients to enter and exit markets, brokers fear.