In just five years, India has gone from being a small player in the market for equity derivatives to the world’s largest. Around $5.5 trillion of these highly speculative instruments are now traded in Mumbai on a daily basis.
Inexperienced retail investors have been piling into a form of derivative known as equity options in search of quick returns, alarming the country’s markets watchdog, which has warned repeatedly that they face significant losses if the bets go wrong.
On the other side of the trades are large financial institutions that have more experience and resources to deploy. Regulators concerned that some market players may be using manipulative practices to skew the system and make massive profits have introduced various measures to bring more order to the derivatives market.
How does options trading work?
Equity options provide investors with the choice, but not the obligation, to buy or sell a stock at a predetermined price and date. These instruments are useful for investors to hedge against risks in their stock portfolios. There are also futures contracts, which oblige an investor to buy or sell a stock at a predetermined price on a specific future date, with no option to back out.
In India, these products have become a way to place speculative bets on moves in share prices without needing to put up large amounts of money. Investors only need to pay for the contract – sometimes costing as little as 10 rupees (12 US cents) – and they can take leveraged positions equivalent to as much as five times their invested capital.
If an investor expects a 5% rise in a stock, they might buy a call option, paying a small premium to the seller, who is often another retail investor. If the stock rises more than 5%, the first investor makes a profit. If it falls, their loss is limited to the premium paid. The major risk is to the seller: If the value of the underlying stock rises above the agreed sale price, they incur a loss.
Why are regulators concerned?
The spread of mobile trading apps, the ease of opening an account and the proliferation of how-to-trade content on social media has fueled a trading frenzy among non-professional investors in India, who see options trading as a quick and cheap way to make money. The number of those investors has gone from fewer than 1 million in 2019 to almost 10 million today.
The Securities and Exchange Board of India (SEBI) has warned of the dangers in trying to bet against larger, better-funded and more experienced financial market players. Specialist firms typically use options as part of “high-frequency” electronic trading strategies executed using powerful algorithms. These allow them to conduct a high volume of trades simultaneously, leaving smaller traders struggling to compete.
In April of 2024, India’s derivatives market grabbed global attention when trading giant Jane Street Group disclosed that it had made a $1 billion profit from trades in the country in a single year.
In July 2025, SEBI announced it would seize 48.4 billion rupees ($570 million) from Jane Street, accusing the US-based firm of making unlawful gains from options trades. It temporarily banned it from trading in India’s securities market while it conducted a detailed investigation.
Jane Street has disputed the findings. In late February, an Indian appeals court adjourned a hearing into the matter after Jane Street alleged that the regulator had withheld key documents that formed the basis of its July order.
What did Indian regulators do to crack down on the market?
SEBI tightened the rules around short-term speculative trading by limiting the number of index options that expire on a weekly basis to just two, down from as many as eight. That reduced access to quick-turnaround trades, in which investors aggressively add positions on the day their contracts settle to benefit from price swings. The regulator had blamed these contracts, first introduced in 2019 by the National Stock Exchange of India Ltd., for “hyperactive trading” and increased volatility seen on expiry days.
SEBI also required brokers to collect larger margin payments from people selling options contracts on their expiry day to ensure their potential losses are covered.
Separately, the government in 2025 increased taxes on short-term trading profits from equities for the first time in 15 years and doubled the transaction tax on futures and options trading. In February, the central bank tightened rules for loans taken out by firms that undertake proprietary trading in shares and commodities and offer leverage to clients.
Have the measures worked?
The value of daily futures and options trading in India peaked at almost $6 trillion in February 2024. But it remains far above the $150 billion level recorded around six years ago. This suggests SEBI is still far from achieving its goal of ensuring that the derivatives are used mainly for hedging actual equity investments, rather than as a profit-making strategy in themselves.
In the shorter term, the regulatory and tax changes are likely to increase trading costs and dent the profits of high-frequency trading firms and domestic trading funds, potentially making it less appealing to allocate capital to Indian markets.
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