The Indian options market is currently clocking volumes that on days are higher than India’s GDP. The option market has seen activity like never before and we have seen historically when the options market is dominated by a lot of retail activity, it ends up very badly. What is the best way to protect the investor and also ensure that the market liquidity is not compromised?
Deepak Shenoy: I would question the second part whether options market retail participation being very high has harmed the market because we have always had a retail run market for the longest time, both in cash and we know the biggest traders in the market on an intraday basis are retail traders, not institutions. And even in options, that has been the case. There is a large amount of them. So, I do not think there is necessarily a need to say that there are too many of them playing this market and therefore we should stop it.

The bigger problem is that a lot of them lose money and maybe are undercapitalised to access some of these markets which have extremely high forms of leverage. The reason it is higher than the Indian GDP that you say is notional turnover which is an option for which you may pay only Rs 5000, it is recorded as a Rs 10 lakh exposure. So, it is a 200-time effective leverage on an option whose notional turnover looks very large, but the option premium itself is relatively small. A lot of options players are in that space and the latest NSE market pulse has about 44% of volume in the options premium turnover alone is by players who have less than one lakh rupees per month, which is probably Rs 5000 per day, which looks like relatively undercapitalised players that are playing this market.

In that context, increasing the lot size would probably make sure that there will be people who will have to put a little more money to play in, slightly more capitalised, because, in an extreme leverage situation, you do require that people have capital to cover for extreme events and that is, unfortunately, something that the retail participant may not have. We should also account for systemic risk because a larger number of undercapitalised players may create a systemic problem if there is a default, so that is another reason why you should kind of strengthen the market dynamics.

Let us agree to disagree on a few things. Would you agree with me that the options market activity is something where it needs supervision and not intervention?
Deepak Shenoy: Yes, I think we need to increase regulatory oversight, create a mechanism that the systemic risk is addressed, and allow for such highly leveraged traders to bring in more capital to the table either by a margin increase or by an increase in lot size.