Futures & Options trading caters to humans' gambling instincts, states Economic Survey 2024

The Economic Survey 2024, authored by Chief Economic Advisor V. Anantha Nageswaran, has now joined the raging debate surrounding futures & options (F&O), or derivatives in a broader context.

"Derivatives trading holds the potential for outsized gains. Thus, it caters to humans' gambling instincts and can augment income if profitable," states the survey, while raising the point of "if profitable."

"These considerations are likely driving active retail participation in derivatives trading," it adds.

In fact, investors are already flocking to 'options' trading because of lower lot sizes and the potential for unlimited gains.

The Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI) are closely monitoring the increasing volume in the equity derivatives segment.

On Friday, SEBI Chairperson Madhabi Puri Buch stated that the capital markets regulator is "compelled" to issue warnings against speculative bets in the F&O segment, as it has become a "macro issue" impacting the broader economy. A study carried out by SEBI revealed that investors lose in 9 out of 10 trades in the F&O segment.

RBI Governor Shaktikanta Das noted that volumes in the derivatives market are perhaps larger than India's nominal GDP.

The Economic Survey warns that derivatives trading, globally, often results in losses for investors. "Raising investor awareness and continuous financial education is essential to warn them of the low or negative expected returns from derivatives trading," it states.

"A significant stock correction could result in considerable losses for retail investors participating in capital markets through derivatives. Investors’ behavioral response would be to feel ‘cheated’ by unseen forces," it states.

"They may not return to capital markets for a long time. That is a loss to them and the economy," it adds.

The Economic Survey also advocates for the orderly and gradual evolution of the financial market. "The financialization of economies has not ended well, even for advanced economies. The global financial crisis of 2008 is an obvious example. Developing countries face debilitating crises when financial market ‘innovations’ and growth run ahead of economic growth. The Asian crisis of 1997-98 set back the high-flying economies of the region for a long time. Therefore, India needs to have an orderly and gradual evolution of the financial market," states the survey.