SEBI calls for more deepening of cash equities markets, highlights dominance of very short-term contracts in derivatives market

Securities Exchange Board of India or SEBI, the domestic capital markets regulator has called for a constructive engagement from all stakeholders on the derivatives market amid high investor losses. Speaking at an event organised by the CII in Calcutta, Sebi whole-time member Ananth Narayan G said that there is no question that derivatives and indeed, speculation are vital for price discovery, hedging, and ensuring market depth. But certain trends in our equity derivatives ecosystem have warranted a closer look for a while now as very short - term derivatives dominate our equity derivative volumes. Research has suggested that expiry day option trading increases market volatility and could lead to noise trading that may potentially undermine confidence in price formation. Unlike longer term derivatives, short - term derivative products such as expiry day trading in index options may detract from capital formation. He noted that as many experts have pointed out, our Indian derivative market ecosystem is quite unique, in that on expiry days, comparable turnover in index options are often 350 times or more the turnover in the underlying cash market - an imbalance that is obviously unhealthy, with several potential adverse consequences. He opined that we must look for further ways to further deepen our cash equities markets, even as we look to improve the quality of our derivatives market by extending the tenure and maturity of the products and solutions on offer.

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