Another day unfolds, and the markets continue their upward trajectory, with disbelief in many corners. The Nifty is nearing 26,000, and today we’ll be discussing derivatives disaster limits reached. SEBI has released a new report on derivatives and how individual traders are performing, which we’ll explore shortly.
Market Overview
The markets are positioned almost exactly where they were at yesterday’s close. The Nifty is up by 0.01%, although it gave back some ground after reaching a high of 26,011, shedding around 70 points in the last three sessions. Overall, the market has gained more than 500 points, resulting in a certain level of tentativeness for further movements.
Nifty Next 50
The Nifty Next 50, or Junior Nifty, is also showing modest movement, rising by 0.13%.
Nifty Mid and Small Cap
Midcaps opened with a gap up and held their position, climbing by 0.31%, while small caps gave up some earlier gains, closing down by 0.21%. However, these moves indicate no significant problems in the market size, with the current action reflecting a typical correction after a steep rise.
Nifty Bank Overview
The Bank Nifty has seen a remarkable run over the past seven to eight sessions and gave back only 0.25% today. This is a healthy sign in terms of momentum trends, where the ratio of declines to advances was nearly even, with 272 to 224 declines slightly outpacing advances. After several sessions of gains, this was expected.
Advanced Declined Ratio Trends
The Foreign Institutional Investors (FII) and Domestic Institutional Investors (DII) numbers for the 23rd were also positive, with FIIs mildly positive and DIIs showing cash inflows of 4000 crores.
Nifty Heatmap
Despite this, the heat map remained largely red, with some finance companies and banks slightly down. For instance, HDFC and Kotak banks were down, while UltraTech Cement dropped by 1.5%, and Grasim fell by 2.5%. However, a few key players like Adani Green, Tata Power, Vedanta, and Dmart saw mild gains.
Sectoral Overview
PSU banks, which had surged in the previous sessions, showed some consolidation today, giving back a portion of their recent gains. Public sector enterprises also exhibited similar behavior. Sectorally, metals stood out as the only strong performer today, buoyed by stimulus announcements from China. These included a half percent rate cut and significant support for the real estate industry, which triggered a rally in metals across Chinese markets. Public sector enterprises also rose by 1%, commodities by 0.9%, energy by 0.8%, and IT by 0.7%. However, FMCG and PSU banks, which had gained in earlier sessions, lost some ground today.
Sectors of the Day
Nifty Metal Index
Among the top performers, metals had a stellar day, with Nalco, Tata Steel, Welspun, NMDC, and Vedanta leading the charge, with metals up by 3%. Copper and silver also followed the upward trend.
Stock of the Day
AstraZeneca Pharma
In the stock spotlight, AstraZeneca surged by an impressive 16.7%, highlighting the strong performance of certain small pockets of pharma stocks. This stock, which was around ₹5000 in April-May, is now nearing ₹8000, showcasing a remarkable rise over the last decade.
Story of the Day
The story of the day focuses on the derivatives disaster limits reached, as SEBI’s report highlights the staggering losses individual traders have suffered in the derivatives segment. Over the last two years, traders have faced a total loss of ₹1.8 trillion, with ₹750 billion lost in FY24 alone. Only 7% of individual traders were profitable over a three-year period, and just 1% earned more than ₹1 lakh. The data reveals that derivatives trading is a low-probability game, with transactional costs playing a significant role in these losses.
It’s notable that 43% of traders are under 30 years old, a significant increase from the 31% seen previously. Many young traders are being lured by influencers and the promise of easy money, but 93% of them are experiencing losses. The data further shows that 75% of traders with annual incomes below ₹5 lakhs are facing significant losses, raising concerns about the financial impact of derivatives trading on lower-income groups.
In terms of profit distribution, the SEBI report reveals that only 101 traders made more than ₹10 crores in profit, while 2,400 traders made over ₹1 crore. Around 26,000 traders earned between ₹10 lakh and ₹1 crore, but the overwhelming majority of traders—more than 23 lakh—suffered losses ranging from ₹1 lakh to ₹10 lakh. Furthermore, 3.9 lakh traders lost between ₹10 lakh and ₹1 crore, while 127 traders lost more than ₹10 crore. The SEBI data suggests that only a small percentage of traders are consistently profitable, while the vast majority are incurring significant losses.
As for SEBI’s measures, they include increasing the contract value from ₹5 lakh to ₹10 lakh, and eventually to ₹20-30 lakh after six months. Upfront margins will be raised for sellers, and the number of weekly expiries will be cut from five to one. SEBI is also looking to implement real-time monitoring of position limits to prevent excessive trading, and brokers will be required to collect margins from option buyers at the start of the trading day. These measures are aimed at curbing excessive activity in the derivatives segment, and the eventual impact will likely be a reduction in trading volumes and liquidity.
As these changes come into effect, there may be a shift in trader interest from derivatives to the cash market, potentially improving liquidity in the latter. While the trend of young people being drawn into derivatives is concerning, it’s worth noting that many of them are taking calculated risks with their money and time, hoping to make a profit. However, the fact that only 1% of traders are making substantial profits is a sobering reminder of the challenges involved. Despite the allure of derivatives trading, the odds of success remain significantly lower than in other business ventures.
