In recent years, retail trader's participation in the derivatives market has increased significantly during and after the COVID bull market. Participation continues to rise every year.
In keeping with the market's growth over the previous six years, market regulator Securities and Exchange Board of India (SEBI) has released a consultation paper to review the eligibility requirements of stocks that are eligible to be traded in the F&O (futures and options) market.
There may be greater risks of market manipulation, increased volatility, and jeopardized investor protection if there is insufficient depth in the underlying cash market and inappropriate position limits surrounding leveraged derivatives, according to the market regulator.
1) Regulation for MWPL
The market-wide position limit (MWPL) for the stock is restricted to a maximum of Rs 500 crore on a rolling basis.
SEBI's proposed change: Since turnover has increased by more than 3.5 times and the overall market capitalization has decreased by 2.8 times since 2018, the regulator has suggested raising this limit to between Rs 1,250 crore and Rs 1,750 crore.
For a given stock, the maximum number of open F&O contracts allowed is known as the Market Wide Position Limit (MWPL). This ceiling is decided by the bourses.
2) Average Daily Delivery Value (ADDV) Regulation
In the previous six months, the stock's average daily delivery value (ADDV) on a rolling basis in the cash market could not have been less than Rs10 crore.
SEBI's proposed change: Given that the ADDV has increased three times since 2018, it is suggested that this amount be increased to between Rs 30 crore and Rs 40 crore.
3) SEBI Regulation for MQSOS (median quarter-sigma order size)
The rolling six-month median quarter-sigma order size (MQSOS) for the stock cannot be less than Rs 25 lakh.
SEBI's proposed change: Since the average market turnover is 3.5 times higher than in 2018, the proposed change should be commensurate with the growth. The market regulator has suggested that the MQSOS now be between Rs 75 lakh and Rs 1 crore.
The order size, expressed in value terms, needed to move the stock price by a factor of four quarters of a standard deviation is known as the median quarter sigma order size. Greater size translates into increased liquidity and makes it more difficult to manipulate the movement of the stock price.
The most recent framework was set by SEBI in 2018 for choosing stocks to be eligible for F&O segment trading. As of March 31, 2018, the number of stocks whose futures and options are tradeable in the Indian markets was 209; this number has now decreased to 182 in fiscal year 2023.
