SEBI Plans Endgame for Weekly
Expiry in Derivatives
SEBI’s move to restrict or do away
with weekly expiries in the F&O is about systemic risk management and
investor protection. Here are the key reasons behind it:
1. Retail investor protection:
- Data shows that retail traders form a
very large share of index option turnover (40%+ of participants in
some segments).
- But the majority of them lose money in
short-term speculative trades, especially in weekly options where time
decay is rapid and volatility spikes near expiry.
- SEBI has publicly expressed concern that
the “casino-like” weekly expiry trade is exposing small investors to
outsized risk and losses.
2. Curbing excessive speculation:
- Weekly expiries encourage very
short-term, lottery-like bets on Nifty/Bank Nifty movements.
- This builds huge intraday speculative
volume, often disconnected from fundamentals.
- SEBI sees this as destabilising and wants
to shift trading behaviour toward longer maturities
(monthly/fortnightly), where speculation is less intense and more
hedging-driven.
3. Systemic risk reduction:
- Huge weekly expiry positions concentrate
liquidity and risk on one day of the week (the expiry day).
- This leads to sharp intraday swings,
option mispricing, and can amplify volatility in the cash market as well.
- By standardising expiry cycles, SEBI aims
to smoothen volumes and reduce expiry-day shocks.
4. Market structure stability:
- NSE and BSE have been competing by
introducing multiple weekly expiries on different days (Nifty, Bank Nifty,
Sensex, FinNifty etc.).
- This has led to overlapping expiries
almost every day of the week, creating continuous “expiry-day”
speculation.
- SEBI wants to end this
“expiry-arbitrage game” between exchanges and bring back balance.
5. Global best practices
- Most mature markets (US, Europe) rely on monthly/quarterly
expiries, with limited weekly products (only for liquid benchmarks and
not across the board).
- India’s F&O market has become the
world’s largest by contract volume, but SEBI worries that the
composition is overly skewed toward ultra-short-term speculation
rather than hedging/price discovery.
In short:
SEBI is acting to protect small investors, reduce market-wide speculative
frenzy, and bring Indian F&O closer to global norms.
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The Profit
Puzzle for NSE
It may have material and negative for NSE’s near-term
profits, but not existential.
Removing weekly expiries and moving to (mostly) monthly expiries will cut
derivatives turnover (hence transaction-fee revenue) substantially; how much depends on how fast traders adjust
and how much volume weekly contracts currently account for.
Why this matters for
NSE’s profitability:-
- NSE’s transaction/turnover charges are
heavily driven by derivatives: in Q4 FY24 the exchange said ~88% of
transaction charges came from equity derivatives (i.e., derivatives
are the dominant source of trading fee revenue).
- Removal/curbs and regulatory actions have
already cut volumes sharply, for
example, index-options premium turnover on NSE fell by ~35–36% over a
short period after regulatory action against a large high-frequency player
(Jane Street). That shows how sensitive volumes (and thus fees) can be to
structural/regulatory changes.
Mechanism: how profit
gets hit:-
- Lower transaction fees (top line): Weekly
expiries are popular with retail/speculative traders and account for a
disproportionate share of daily contract volume. Moving to monthly
expiries reduces trading frequency and the number of contracts traded,
thus, directly lowering NSE’s transaction-fee income.
- Operating leverage (bottom line):
Exchanges have high fixed costs (technology, surveillance, clearing
infrastructure). Revenue falls won’t be matched by immediate cost
declines, so profits fall faster than revenue unless the exchange
cuts costs or finds replacement revenues. Reuters / NSE commentary has
repeatedly pointed to transaction charges as the major revenue driver.
- Liquidity / market share effects: If
traders concentrate on the single allowed weekly contract (or move
activity to another exchange or instrument), liquidity may fragment. That
can reduce order flow for some NSE products, reducing ancillary revenues
(market data, clearing, connectivity).
- Volatility / option premium effects:
Lower short-dated trading may reduce intraday/near-term volatility and
option-premium volume (less trading in short time-decay plays), hitting
premium-related turnover. We’ve seen option premium turnover shrink in
stressed episodes.
What NSE (and other
exchanges) should do:
1.
Product substitution: Traders
might move to monthly or longer-dated strategies (calendar spreads, LEAPS), or
to cash market hedges; some volumes will
reappear elsewhere (but spread over fewer contracts and lower turnover).
- Lobby / consult for a glide path: work
with SEBI on phased implementation to smooth volume transition (SEBI has
signalled glide-path ideas).
- Product & fee engineering:
tweak fee schedules, encourage monthly/quarterly product liquidity, and
create new derivatives products that attract flow.
- Expand non-transaction revenues:
accelerate market-data commercialisation, indices licensing, cross-border
services, and tech services to brokers.
- Capture residual retail flow:
offer simplified, regulated products (ETFs, structured products) that
attract retail hedging/speculation in a safer way.
Bottom line :
Because derivatives transaction
fees are the single largest driver of NSE’s transaction revenue, ending
weekly expiries will very likely reduce trading volumes and therefore meaningfully
depress NSE’s near-term revenue and profits (order of magnitude: think tens
of percent of transaction revenue in a plausible base case). The precise hit
depends on how much of today’s volume is truly “weekly-only” flow and how
quickly the market — traders, market-makers and the exchange itself — adapts
Thakur Ajit Singh
Founder
Graded Financial Services - A Mall of Financial Products and Services,
Quick Turtle - An Executive Placement firm,
Chairman, Investor & Consumer Protection, MRCC,
Trainer | Management Consultant
Cell: 8169810833
