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 Introduction

Indian equity markets have undergone a remarkable transformation, with derivatives trading now dominating the landscape. Equity derivatives account for a staggering 99.6% of market volumes, totaling over US$4.3 trillion per day. Alignment of expiries in key indices to different days of the week now facilitates zero-day expiries, and will further boost volumes. Collins Dictionary defines derivatives as contracts, such as options or futures contracts, whose value is contingent on the value of the underlying securities or commodities. Originally designed as a tool for hedging risk, derivatives are now a tool for taking risk. This can be witnessed in their exponential growth, with derivatives now 400x that of cash equity and 900x of delivery based trading volumes. Change in contract structure, leverage combined with the ease of onboarding and interface of the new generation trading apps has triggered gamification of this market. As a result, the number of active derivatives traders has increased eightfold from less than half a million in 2019 to 4 million. This, in conjunction with sachetization, has attracted a younger demographic as well as clients from Tier II and III cities. Index options are the preferred choice, constituting 99% of derivative volumes and within this, weekly account for 95% of the trades. The effective leverage on an index option during expiry day is 500x, which is luring the retail traders. A `2,000 option allows `10 Lakh exposure and these are largely speculative bets a retailer holds an option on average for just 30 mins.

Derivatives share high globally, but in India 400x of cash market

The growth of derivatives market is not unique to India, in most markets today derivatives volume outstrips the cash market volumes. In the US, derivatives account for 70% of traded volumes, compared to 99.6% currently for the Indian markets. A key reason for attractiveness of the product is the embedded leverage, where only a fraction of the notional value is needed to transact that ends up magnifying the potential gains (as well as losses) for the participant.

Derivatives volumes are >400x of cash trading volumes in India, highest globally

In most markets, derivatives volumes now account for 5-15x their cash market volumes. In India today however, derivative volumes are more than 400x higher than that of underlying cash market today, having grown from 3x in 2010. Total derivatives volumes have risen to over US$4.3tn per day roughly translating to 125% of the underlying companies’ market capitalization or over 200% of its free float being traded every day

Derivatives volumes have reached $4.3 trn per day

Gamification leads to influx of traders

Change in contract structure, leverage combined with the ease of onboarding and interface of the new generation trading apps has triggered gamification of this market with number of active derivatives traders jumping 8 times to 4 mn from less than 0.5m in 2019. In comparison, in the cash market, the number has grown 3 times - from ~3mn in 2019 to 11 mn.

Number of derivatives traders is up 8 times, cash market sees 3x jump 

Of the over 5,000 companies listed in India, derivatives contracts are available for 193 stocks and indices. For these, there are ~46,000 individual contracts available at any point spanning products (futures, options), tenor and strike prices. Index options reign supreme accounting for 98% of total derivative volumes.

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