In a decisive move to curb excessive speculation and protect retail investors, the Securities and Exchange Board of India (SEBI) is considering a cap of ₹1,500 crore on net intraday positions in equity index derivatives. The proposal, discussed by SEBI’s Secondary Market Advisory Committee (SMAC), follows enforcement action against U.S.-based high-frequency trading firm Jane Street, whose aggressive strategies allegedly distorted market dynamics and led to significant retail losses.
Background: Jane Street’s Controversial Trades
Jane Street, a global market-making firm known for its algorithmic trading, was temporarily banned from Indian markets earlier this year. SEBI accused the firm of manipulating benchmark indices such as Nifty and Bank Nifty to secure outsized gains in options trading. The regulator ordered the disgorgement of nearly ₹4,850 crore in alleged illicit profits and launched a broader review of intraday trading norms.
SEBI’s internal study revealed that on expiry days—when derivative contracts mature—trading firms often exceed end-of-day position limits by taking large intraday bets that are squared off before market close. This loophole allowed firms to bypass regulatory thresholds and amplify volatility, especially in index options.
The Proposed Cap: ₹1,500 Crore Net Intraday Limit
The new proposal recommends capping an entity’s net intraday position in equity index derivatives at ₹1,500 crore. This limit is intended to:
- Prevent outsized intraday exposures
- Reduce systemic risk on expiry days
- Ensure fair play and protect retail participants
Currently, entities are subject to an end-of-day net position cap of ₹15,000 crore and a gross position limit of ₹1,00,000 crore. However, these limits do not apply to intraday trades that are closed before market close, creating a regulatory blind spot.
Why SEBI Is Acting Now
SEBI’s urgency stems from alarming data on retail losses in derivatives:
- 91% of retail traders incurred net losses in FY25
- Total retail losses exceeded ₹1.06 trillion, up 41% from the previous year
- Average loss per trader rose to ₹1.1 lakh
- Cumulative losses since FY22: ₹2.87 trillion
The regulator believes that unchecked intraday speculation—often driven by finfluencers and algorithmic strategies—has created a high-risk environment for retail investors. The proposed cap is part of a broader effort to restore balance and transparency in the derivatives segment.
Implications for Market Participants
If implemented, the ₹1,500 crore cap will significantly impact:
High-Frequency Traders and Prop Desks
- Reduced flexibility in intraday strategies
- Need to recalibrate algorithms and risk models
- Potential decline in expiry-day volumes
Brokerages and Trading Platforms
- Increased compliance burden
- Real-time monitoring of client exposures
- Possible drop in intraday turnover
Retail Traders
- Lower volatility on expiry days
- Reduced risk of manipulation
- More predictable price behavior in index options
Stock exchanges have reportedly sought clarity on enforcement thresholds and penalty mechanisms. SEBI may mandate exchanges to monitor breaches and report violations, especially on expiry days when speculative activity peaks.
Next Steps: Regulatory Review and Implementation
The proposal has been forwarded to SEBI’s board for final approval. If cleared, it could be rolled out in phases, starting with weekly index options like Nifty and Sensex. The regulator may also introduce:
- Penalties for breaching intraday limits
- Enhanced surveillance on connected foreign entities
- Mandatory disclosures for large intraday trades
SEBI is expected to consult with stakeholders, including exchanges, brokers, and institutional traders, before finalizing the framework.
Conclusion: A Turning Point for Derivatives Regulation
The “Jane Street effect” has prompted SEBI to rethink its approach to intraday trading in equity index derivatives. By proposing a ₹1,500 crore cap, the regulator aims to strike a balance between market efficiency and investor protection.
While the move may dampen short-term volumes, it signals a shift toward more disciplined and transparent trading practices. For retail investors, it’s a step toward a safer, more equitable market—where strategy matters more than speed.
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