Will Raising STT Actually Stop Speculation?

The Hon'ble Finance Minister mentioned in her public interaction that the Union Budget's plan to increase the Securities Transaction Tax (STT) aims to cut down on too much speculation in our stock markets. Look, I understand the intention. Step into any café in the city or talk to an average derivative retail trader, and you'll see young folks totally absorbed in their phones, swapping weekly options like they're playing a video game. Policymakers are understandably concerned.

Will increasing the STT truly be effective? I really don't think so.

Taxation is inherently a blunt instrument—like using a sledgehammer when you need a scalpel. When it's not set up properly, it messes with the markets without really changing how people behave when they're speculating. We need a more nuanced approach that addresses the roots of excessive speculation while preserving market efficiency.

Let me propose three alternatives that deserve serious consideration.

Harmonise CTT and STT to Stop Regulatory Arbitrage

India levies STT on securities and CTT on commodity derivatives, but these rates aren't aligned — creating massive arbitrage opportunities.

When taxes differ across markets, speculative capital doesn't disappear—it migrates to cheaper venues. I've seen this repeatedly. Whenever commodity derivatives saw regulatory changes, trading patterns shifted overnight. Hedgers moved out and were only left with speculators. Ultimately, hedgers resolved to completely cease utilising Indian commodity markets for hedging purposes.

If STT rises while CTT stays lower, we don't see reduced speculation—just redistributed speculation. While trading volumes may fluctuate across different segments, the overall level of speculative intensity remains consistent. Authentic hedgers are the ones who bear the expenses. That's why Indian exports and the Make in India initiative are struggling—there's really no solid way to hedge risks in our commodity markets.

If the objective is genuine market discipline, CTT and STT should be equalised. Uniform taxation reduces distortions and communicates policy intentions that prioritise systemic stability rather than imposing selective punishment.

Accelerate Settlement Cycles

Speculation flourishes in the presence of timing discrepancies. When settlement cycles vary across exchanges, traders exploit the mismatches, rolling positions and leveraged trades without adequate capital backing. It’s a significant structural vulnerability that we continue to overlook.

India has moved to T+1 settlement in equity markets. The next step? Same-day settlement (T+0) across all exchanges.

Same-day settlement reduces counterparty risk, margin mismatches, and intraday leverage windows. For genuine hedgers, it cuts overnight uncertainty and enables real-time risk management. Speculative traders depend on these settlement gaps. Compress the time frame, and you automatically limit excessive position-building without touching tax rates.

Yes, T+0 has challenges—operational hurdles, technology requirements, and resistance from beneficiaries of the current system. But the benefits for market stability are substantial.

Protect Vulnerable Investors, Don't Punish Everyone

The explosion in retail derivatives trading has raised legitimate concerns. SEBI data shows that the majority of small traders lose money in high-frequency derivatives trading. We're talking about 89% loss rates in some studies. That's not a market—that's a casino with worse odds.

But raising STT punishes everyone: pension funds, mutual funds, institutional investors, hedgers, and retail traders alike. It undermines market efficiency by widening spreads and discouraging liquidity.

There's a better way to do this. Instead of just bumping up costs for everyone, let's focus on making things safer for those who really need it. That way, we can ensure that people are somewhat invested or have a stake in it. Also, how about some real risk assessment tests to make sure retail investors actually get what's going on?

I think we should set position limits based on a person's income. We should think about setting a minimum capital requirement, maybe around Rs. 10 lakhs. An alternative approach might involve connecting it to the individual income tax exemption threshold. Plus, it would make sense to have some cooling-off periods after someone takes a big loss. That way, they can take a step back and regroup. Plus, we need to tighten up the rules for brokers to make sure they're suited for their clients.

The broker piece is crucial and currently a joke. I've seen 20-year-olds with Rs 50,000 in their bank accounts for college expenses being urged by relationship managers to engage in intricate options trading strategies that they don't fully grasp. The incentive structure is completely misaligned—brokers make money on volumes, not client profitability. This must change under the law to prevent motivation for speculative trading by brokers.

These targeted barriers are meant to help new investors stay safe while still letting big institutions manage their risks. They protect retail participants while ensuring the preservation of market liquidity.

The Bottom Line

India's capital markets are critical for financing growth. Significant transaction cost increases could undermine our competitiveness—deterring foreign investment and raising hedging costs. We're competing with Singapore and Hong Kong. Every basis point matters.

Speculation helps make it easier to trade and figure out prices. The challenge is preventing destabilising excess, not eliminating it.

Tax hikes may generate short-term revenue—and let's be honest, that's probably a significant driver here—but they don't alter speculative psychology. Meaningful change requires structural reform, which is harder and less politically convenient.

If controlling speculation is the genuine objective, align CTT and STT rates, accelerate same-day settlement, and implement targeted investor safeguards.

Markets work better when there’s good regulation in place, not just harsh taxes that only deal with the symptoms of problems instead of fixing the root causes. The Union Budget has the potential to enhance market stability rather than merely serve as a tool for revenue generation. Whether policymakers will take that opportunity remains to be seen.

(Authored By Adv. Vijay Sardana- IIMA Alumnus, Techno-Legal and Risk Management Expert, Advocate, Supreme Court of India, High Courts and Tribunals)