The bad, the worse and the worst

Just about 20 days back, SEBI released a research report proving that futures & options (F&O) trading was overwhelmingly a loss-making proposition for investors. The report showed that 89 per cent of investors lost money in these activities. F&O, as an activity, does nothing but make losses for investors to generate profits for the exchanges and brokers. However, this is not enough. Therefore, to further increase the losses of investors and the profits of the exchanges, trading hours are to be extended till midnight. Of course, 'exchanges' in India mean the NSE, given the actual market share.

Anyway, the extended trading hours are good news. After all, why do traders need to make money? They would just waste it somewhere or the other. The fact that they are F&O traders proves they are altruistic individuals who care more about others' well-being than their own. The NSE should take all the money since it is a good corporate citizen, as are its shareholders. It pays taxes and gets embroiled in scandals no more than once every five-10 years.

Going through the reactions in the mass media and social media to the proposed timing extension is quite interesting. Those who favour it generally give two types of reasons: One is that some open their mouths and emit a cloud of phrases like capital formation, increased liquidity, hedging opportunity, etc. Two, the exchange's official reason seems to be that trading volumes are being lost to markets abroad. Three, those who can't trade during the day because they have jobs and other professions can conveniently trade at night.

Reason one is a copy-paste from some dictionary or textbooks on derivatives and has no actual on-the-ground connection with what happens in India. As for reason two, the only reasonable response is, "So?" Regarding reason three, it's hard to believe this is being trotted out as a good thing. A system where people do useful jobs during the day and trade during the night is certainly nothing to work towards.

If we look at the views expressed by the other side, they are more interesting. No one outside the business speaks up in favour of the timing extension. Whether professionals or individual investors, those who do the trading seem uniformly against it. All of them give reasons like stress, fatigue and work-life balance. Even some people inside the business - -like Zerodha CEO Nithin Kamath - say that this will inevitably lead to more stress and overtrading.

Let's be clear - regulators should be bothered about not more trading but the toxic industry structure. For the exchanges and the brokers, the path to more profits passes squarely through luring traders to an activity with 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.

However, in all this propaganda, no one in the industry will mention one simple fact: every time someone makes a profit, it has to be someone else's loss. Unlike buying actual equity, where the economy's open-end growth backs it all, F&O is a zero-sum game. It's a negative sum game for investors because of the costs - which are the industry's profit. 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. Encouraging this activity by extending trading hours on some specious reasons dished out by those with a vested interest is tragic.

Suggested read: A black hole for your money