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India's global turnover of F&O trading

ICICIdirect 6 Mins 05 Jul 2024

India has emerged as a significant player in the global financial markets, especially when we talk about futures and options (F&O) trading. Over the past decade, the Indian derivatives market has seen substantial growth, driven by regulatory reforms, technological advancements, and increasing participation from retail investors. The total turnover, which reflects the value of contracts traded, has reached staggering heights, surpassing traditional cash market activity. In this article, we look at the latest developments.

Understanding F&O Trading

Futures and options (F&O) are financial derivatives that allow investors to hedge risks or speculate on the future price movements of various underlying assets, such as stocks, indices, commodities, and currencies.

  • Futures: Contracts to buy or sell an asset at a predetermined price on a specific date.
  • Options: Contracts that give the buyer the right, but not the obligation, to buy or sell an asset at a predetermined price before or on a specific date.

World's leading bourses in F&O

Based on the total number of contracts traded in 2023, here are the world's leading bourses in F&O:

National Stock Exchange of India (NSE): It has emerged as a major player in the F&O market in recent years, driven by the increasing participation of retail investors in India.

Chicago Mercantile Exchange: It offers a wide range of futures and options contracts on interest rates, equities, agricultural commodities, metals, energy, and foreign exchange.

Korea Exchange: It offers a variety of futures and options contracts on equities, indices, foreign exchange, and commodities.

Eurex Exchange: Similar to the Korea Exchange, it also offers a wide range of F&O contracts on equities, indices, interest rates, commodities, and foreign exchange.

LIFFOE(London International Financial Futures and Options Exchange): Offers all services as mentioned above for bourses.

Indian F&O market by trading volume and turnover

Let us look at the Indian F&O market by trading volume and turnover from recent months. India's monthly F&O turnover reached a record Rs 8,740 lakh crore (or $1.1 trillion) in March 2024. This phenomenal surge represents a significant jump from just Rs 217 lakh crore (approximately $ 27 billion) in March 2019. The average daily turnover in the F&O segment now dwarfs the equity cash segment, highlighting the growing popularity of derivatives trading among retail investors.

In April, a total of 8,484 million contracts were traded on the NSE, which was the highest among all global bourses. NSE was followed by BSE, which saw a little over 2,224 million contracts changing hands in April.

India's Global position in F&O Trading

Let us look at some of the numbers and give you an idea of India's position in F&O trading globally.

Based on the number of contracts traded, India's National Stock Exchange (NSE) has become the world's largest derivatives exchange. Data from the Futures Industry Association (FIA) for 2023 shows it surpassed established players like the Chicago Mercantile Exchange (CME Group). Looking at the recent month (April 2024), the combined volume of BSE and NSE was nearly 81% of the global equity derivatives turnover.

To give you an idea of India's position, the exchange that occupies the third position, Brazil’s B3, saw a little over 692 million contracts being traded in April (check number for India in previous section).

Taking a quarter data, over 84% of all equity options traded globally in the first quarter of 2024 were on Indian exchanges, a significant jump from just 15% a decade earlier.

Before you go

While the booming F&O market signifies a growing financial sophistication among Indian investors, concerns regarding potential risks are also being voiced. Unlike buying stocks directly, F&O contracts involve leverage, which can amplify both profits and losses. This exposes retail investors, who may not fully understand the complexities of derivatives trading, to the risk of significant financial losses.

Market regulators and financial experts have called for caution and investor education. Emphasizing the importance of risk management and a thorough understanding of F&O instruments is crucial. Additionally, stricter regulations and margin requirements might be necessary to safeguard retail investors from potential pitfalls.

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