Sebi might review proposed options trading limits

The Securities and Exchange Board of India (Sebi) may reconsider its proposed limits on trading options after receiving widespread criticism. Many brokers and traders fear that these changes could reduce market liquidity and increase trading costs. Sebi's proposal aimed to set a gross limit on index options trading, which would change how open interest (OI) is calculated. Open interest represents the total outstanding positions in derivative markets. The goal was to reduce market manipulation and better assess risks. However, market participants expressed concerns that these changes would make it more expensive to trade. Brokers predict that the new gross limits would widen the difference between buying and selling prices, making it costlier for clients to enter and exit trades. They worry this could lead to a lack of liquidity in the market. While Sebi’s goal is to prevent manipulation, some argue that the proposed changes would hinder proper trading strategies. Sebi has received around 1,000 comments on the proposal, with most feedback criticizing the gross limit idea but praising the shift to calculating OI using delta. Delta measures how an option's price changes with fluctuations in the underlying index. Market experts argue that simply using a gross limit does not account for the complexities of trading options and could limit the effectiveness of large trading funds. They express concerns that the new rules may disrupt trading by institutional and proprietary firms, potentially leading to lower market activity. Sebi's recent proposals follow a previous tightening of trading rules for retail traders, who reportedly lost a significant amount in derivatives trading between 2022 and 2024. These changes seem aimed at curbing excessive speculation in the market. The impact of any new rules remains uncertain, but many in the trading community are anxious about the potential consequences.