How derivative dreams can turn into nightmares but still lure us

Retail investors think they'll make winning bets and it suits large interests not to drive them away

- DEVINA MEHRA

We hear a lot about the Securities and Exchange Board of India's (Sebi) finding that about 93% of all participants in the futures and options (F&O) market lose money. Given the peculiarities of the human mind, everyone seems sure that they will be among the 7% who are winners. In this belief lies a business opportunity for those offering derivative training courses. Of course, anyone who has a magic wand that can make 1% everyday in financial markets can turn 1 crore into 20,000 crore in five years and has no economic reason to sell you a course for a few thousand rupees.

But the point is not just that 93% lose money, it is who the losers and winners are. Sebi data is clear: those losing money are individuals and another category of 'others,' under which NRIs, trusts, etc., are clubbed. Those making money also are in two categories. One is of foreign portfolio investors and the other is called 'proprietary.' These are large Indian set-ups that are probably using algorithmic trading or some other systems to trade. Interestingly, there are only a few hundred players registered under the proprietary and foreign portfolio investor groups, whereas those in loser categories number almost 10 million.

My own October analysis based on Sebi data (shorturl.at/POTdW) showed that the few who profit are mostly institutions or sophisticated players. Retail traders, especially those from non-metro, lower-income or less-educated backgrounds, are the worst hit.