FPIs tap algos to snag $7.3 bn in profits from equity derivatives

Foreign portfolio investors (FPIs) and proprietary traders made about $7.3 billion (₹61,000 crore) in profits from trading Indian equity derivatives in FY24, the capital markets regulator said in a study, with a majority of the profits being made by “algo entities”.

The study conducted by the Securities and Exchange Board of India (Sebi) also showed that nine out of 10 individual traders in the equity futures and options (F&O) segment incurred significant losses, with aggregate losses of individual traders exceeding ₹1.8 trillion over the three-year period between FY22 and FY24.

The Sebi report follows a study published in January last year that found 89% of individual equity F&O traders lost money in FY22.

With increased participation of individual investors in equity and equity derivatives markets, the current study was conducted to analyze profit and loss patterns for individual traders in F&O during the three years FY22 to FY24, and for all the categories of investors in F&O during FY24.

The latest Sebi report is based on data from top 15 brokers, accounting for about 90% of total individuals and 75% of individual client-level turnover in NSE equity F&O segment during FY24.

The number of retail traders has almost doubled in two years from about 5.1 million in FY22 to about 9.6 million in FY24, and currently constitutes 99.8% of total traders in the equity F&O segment, the study said, adding that individual traders contributed about 30% in total turnover in the past fiscal year.

Nine-tenths of the individual F&O traders incurred average losses of around ₹2 lakh per trader, inclusive of transaction costs, during the three years from FY22 to FY24. The top 3.5% of loss-makers, or about 400,000 traders, faced an average loss of ₹28 lakh per person over the same period, inclusive of transaction costs, the study showed.

Only 1% of individual traders managed to earn profits exceeding ₹1 lakh, after adjusting for transaction costs.

Among profit-bookers, proprietary traders and FPIs booked gross trading profits of ₹33,000 crore and ₹28,000 crore, respectively, in FY24 before accounting for transaction costs.

Most of the profits were generated by larger entities that used trading algorithms, with 97% of FPI profits and 96% of proprietary trader profits coming from algorithmic trading, the study said.

The study showed trading costs eroded a significant portion of traders’ capital. On an average, individual traders spent ₹26,000 per person on F&O transaction costs in FY24.

Over the three-year period from FY22 to FY24, individuals collectively spent about ₹50,000 crore on transaction costs, with 51% of these costs being brokerage fees and 20% being exchange fees.

The study also showed that the proportion of young traders, or those below 30 years, in the F&O segment rose from 31% in FY23 to 43% in FY24, with more than 75% of individual F&O traders in FY24 declaring an annual income of under ₹5 lakh.

The Sebi study also noted that despite consecutive years of losses, more than 75% of loss-making traders continued trading in F&O.