Sebi likely to review options limit move

The market regulator may review its contentious proposal to introduce a gross limit for all clients trading in index options after receiving feedback against such a rule from several market participants, a person aware of the development said.

- Ram Sahgal & Neha Joshi

The Securities and Exchange Board of India's (Sebi) planned review comes after brokers, proprietary desks and institutional traders flagged risks of reduced market liquidity and higher trading costs in India's derivatives market if the rule is implemented.

The regulator recently proposed to change the way of calculating open interest (OI) and introduced 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 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.