Jane Street scandal leaves desi traders cornered

India’s thriving options market is feeling the heat, as the fallout from the Jane Street scandal and Sebi’s tightening grip on derivatives trading threatens to upend a once-flourishing landscape.

Market veterans say the reverberations are unmistakable. The shift from weekly to monthly expiry in Bank Nifty options has pushed up costs for end-of-month contracts, making them markedly pricier than their shorter-term predecessors. As a result, volumes in Bank Nifty futures and options - once the world’s most traded index derivatives - have dropped off sharply.

"The Golden era of Indian options market may have ended," a well-known index trader told Business Today. "The market is no longer that liquid and the number of tradeable instruments has come down significantly."

Sensex options, long plagued by illiquidity, have failed to attract serious interest from large traders. That leaves Nifty options as the only viable playground. But even here, storm clouds are gathering.

Sebi is now reportedly considering a move to link an entity’s cash market positions to its derivative exposure - a proposal that could further squeeze institutional players and high-volume traders.

Across the board, the listed capital market space is showing signs of distress. Declining stock prices of BSE and listed brokerages are dampening sentiment and casting a shadow over the valuation of the unlisted NSE, the exchange, long touted as India’s crown jewel in stock market infrastructure.

Pain, it seems, is spreading through every layer of the trading ecosystem.

Separately, the Securities and Exchange Board of India (Sebi) is reportedly considering a formula-based mechanism to link leverage in options trading to investors' cash positions.

The proposed move aims to curb excessive speculation, enhance retail investor protection and shift some focus back to the cash market -- potentially boosting its liquidity while cooling down the overheated options segment.

Additionally, Sebi is said to be evaluating further measures to restrict retail participation in the options segment.