A black hole for your money

SEBI's recently released study kicks of with the sentence "89% of the individual traders (i.e. 9 out of 10 individual traders) in equity F&O segment incurred losses, with an average loss of Rs. 1.1 lakh during FY22..." No one who observes the equity markets should be surprised by this. That almost all individual traders make heavy losses in F&O is a known fact but it's important that the SEBI study has put a number to it. In fact, in my observation, if the traders had been tracked for a longer period, the number would be 95 or 99 per cent.

The bigger question is what is going to be the regulator's next step, what is SEBI going to do about this? Of course, the idea that the regulator should do anything about this sounds repugnant to many people. When this study was released some weeks back, a common response to this idea, in news articles as well as on social media, was that it's the traders' own problem. However, this response is completely misguided.

For investments like delivered shares held for a long period or for mutual funds, or almost any other legitimate investment, I would agree that the losses are the traders' own responsibility. However, in the case of F&O, the reality is something else. Derivatives are the bread, butter and jam of this business for the stock exchanges as well as brokers. The entire business model of the trading industry is to increase derivatives volumes. Everyone involved is constantly trying to herd their clients away from simple stock ownership towards F&O because that's where the profit is. And, as the SEBI study now proves, for the investor, that's where the losses are.

So what we have here is an absolutely toxic industry structure. For the exchanges and the brokers, the path to more profits passes squarely through luring traders to an activity which has a 90+ per cent chance of making losses. Of course, the actual investors have no clue about the true nature of what they are doing. The few who try to educate themselves about derivatives are given the standard spiel about the advantages of derivatives, how they enable traders to trade safely, how they promote liquidity, how they promote price discovery, etc etc.

However, in all this propaganda, no one in the industry will mention one simple fact - that every time someone makes a profit, it has to be someone else's loss. Unlike buying actual equity, where there is the open-end growth of the economy backing it all, F&O is a zero sum game. That all the lakhs of crores of derivative trading activity - well above 90 per cent on Indian exchanges - produces no wealth at all in the aggregate is a sobering thought. If anyone is getting richer, then it's only because someone else is getting poorer. Oh and of course, the brokers and the exchanges and those who are lending stocks are making money out of all this activity, which is pretty much the goal of it all.

So what should be done about this? At an individual level, it's quite clear - just steer clear of derivatives. You are going to lose money, and likely lose big time. Yes I know the SEBI study shows that 10 per cent of traders made money and 100 per cent of traders believe that they are going to be part of that 10 per cent. However, that's just the industry propaganda doing the job on you - don't fall for it.

The larger question is what is the regulator going to do about this? Surely, there's some further action that will follow from this study. If everything is going to continue exactly as it is then derivatives volumes will go on increasing and traders' money will keep flowing into the pockets of the industry fat cats. Surely, that can't be the agenda!

Suggested read: The giant underbelly of the markets