Traders hope for Sebi rethink as intraday position rule may hit market volumes

Intraday monitoring of position limits to strengthen the index derivatives framework has to go live on 1 April. It’s the sixth measure that the Securities and Exchange Board of India (Sebi) introduced in a staggered manner from 1 October.

A change of guard at Sebi has given market participants hope that the regulator would defer the rule until it decides on the implementation of a proposal for determining the position limits.

The rule will ensure that no trader or client exceeds the ₹500 crore net position limit during the day. Currently, traders exceed that threshold intraday, imparting liquidity and reducing the cost of executing transactions in the bargain, but bring down their positions to the mandated limit by end of trading day, say broking officials.

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Traders fear that placing an intraday monitoring mechanism will bring down exchange volumes drastically. This will result in buy-sell quotes widening, increasing the cost of executing transactions and hurting retail investors eventually as derivatives markets have a nexus with cash markets, and vice versa.

"The intraday monitoring rule will severely impact market volumes, resulting in widening bid-ask spreads, which will hurt retail investors eventually, as traders who provide liquidity to the markets will be curtailed by intraday limits, which is currently not the case," said Narinder Wadhwa, managing director at SKI Capital.

Wadhwa said brokers and traders hope that Sebi would defer the rule until it decides on a proposal that imposes gross limits on trading entities.

This proposal, part of a consultation paper addressed primarily at proprietary and high-frequency traders last month, changes the way open interest or outstanding position is calculated from a notional-based approach to one based on the way an option contract's price reacts to changes in an underlying index's price change.

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Furthermore, the proposal seeks to add a client's long and short options positions separately to arrive at a gross limit for index options against a net limit in vogue now.

The net limit allows higher intraday risk-offsetting positions—buying of at-the-money calls and selling out-of-the-money calls, for instance—to be taken by traders so long as they stay within the net permissible limit by end of day.

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The trading community, especially high-frequency traders, has strongly objected to the proposal for a gross limit. Until Sebi decides on the gross limits and other provisions of the consultation paper released on 24 February, brokers and traders hope it will postpone the intraday monitoring rule.

Sebi did not respond Mint's query if the intraday monitoring of position limits will be deferred and its impact on markets as claimed by participants.

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However, a Sebi official told Mint earlier that it would review its proposal for a gross limit in light of the objections raised through public comments.

"There will be a significant impact on volumes because of intraday monitoring but, at the same time, excessive volatility in the markets will decrease if intraday limits are imposed on HFTs and their like," said Kruti Shah, quant analyst at Equirus.

Another broker, speaking on the condition of anonymity, said the impact would be as "severe" as having a single weekly option expiry contract from five earlier.

In its 1 October circular, Sebi limited weekly expiry contracts to one per exchange from four on NSE and two on BSE earlier, increased contract size to ₹15-20 lakh from ₹5-10 lakh and implemented the changes in a staggered manner. For instance, the contract size was increased from 20 November last year and intraday monitoring was to be implemented from 1 April this year.

These measures were aimed at curtailing retail frenzy in weekly options on expiry day. The latest proposals for changing the calculation of open interest and imposing a gross limit are aimed at HFTs and prop traders.

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