Recalibrating market vigour

DERIVATIVES BOOM HAS SHOWN INDIA'S MARKET POTENTIAL, THE REFORMS AHEAD WILL DEFINE ITS PURPOSE

- CKG NAIR V SHUNMUGAM

VARIOUS REGULATORY MEASURES taken up in the past six months—including regulatory tightening,enhanced surveillance, and punitive actions against high-frequ-ency trading entities like Jane Street—have effectively cooled India’s equity derivatives frenzy.

Volumes that once seemed unstoppable have decreased. However, this slowdown might be temporary unless more fundamental structural changes occur. The regulatory measures attempted to address the excesses in derivatives, but the real challenge is maintaining this effort until the market’s underlying framework is reshaped. A half-finished battle could leave the system vulnerable to the same excesses that were briefly subdued.

The surge in derivatives, especially weekly index options, has been both remarkable and concerning. Notional turnover increased at a rate unmatched in any major economy, often surpassing the cash market by more than 20 times. This explosive growth wasn’t driven by fundamental investing or long-term hedging, but by a behavioural shift towards leveraged, short-term trading. Algorithmic strategies and complex, machine-driven orders began to dominate daily turnover, while retail investors—often unprepared and inexperienced—rushed into seemingly straightforward opportunities. The marketplace turned into a high-speed race where Ferraris and scooters shared the same lane.