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Our special correspondent Zhen Xiang

"The situation where trading firms made billions of dollars in profits may be over," the head of trading at Equirus Securities, an Indian financial services company, told Bloomberg on July 30. In order to calm overheated trading, the Securities and Exchange Board of India issued several draft policy recommendations on the same day to tighten the rules for financial derivatives trading.

Data shows that the Indian stock market has hit new highs recently. Last month, the Indian SENSEX index broke through 80,000 points for the first time. The hot stock market has also boosted financial derivatives trading such as stock index options. In early February this year, the notional amount of Indian derivatives contracts reached 6 trillion US dollars, even exceeding India's GDP. Indian authorities warned that it was "human nature to gamble" that drove the behavior of retail investors, and this enthusiasm could hinder the channeling of household savings to productive uses. A survey conducted by the Securities and Exchange Board of India last year showed that 90% of retail investors suffered losses in financial derivatives trading.

On July 31, the Indian edition of Fortune magazine quoted recent remarks by Securities and Exchange Board of India Chairman Madhabi as saying that when Indian households suffered total investment losses of 600 billion rupees (about 51.9 billion yuan) in the stock index futures market in one year, and these funds could have been more efficiently invested in other financial products, the problem has already had an impact on the macro economy.

In order to curb speculation in stock futures and options, the Securities and Exchange Board of India issued the latest strong regulatory measures on July 30, mainly including: raising the minimum size of stock index futures contracts, collecting option fees in advance, streamlining the number of weekly contracts, and increasing margins before contract delivery. A week ago, the Indian government also announced that the tax rate on stock index option transactions would double from October 1.

It is worth noting that, according to Bloomberg, the booming Indian stock market, especially financial derivatives trading, has attracted many international quantitative funds to enter the market, including Citadel Securities and Autiva. Jane Street Capital announced in April this year that the quantitative strategy implemented in the Indian market has achieved a profit of US$1 billion. On the one hand, this shows that there is indeed a huge profit space for institutional quantitative operations in the early Indian market environment, and on the other hand, it also highlights the huge disadvantages of retail traders in the market.

Bloomberg said that the restrictions issued by India may reduce the liquidity of the $4 trillion futures and options market and cut the profits of market makers and traders. Jefferies Group of the United States also pointed out in a research report released on July 30 that the new regulations will directly affect about 35% of stock index option transaction fees, and retail investors may also leave the market due to the new regulations, which will inevitably impact the stock brokerage business.

"The game between institutional high-frequency trading and retail investors is a 'cat and mouse game'. Institutions are the cats and retail investors are the mice. When regulatory authorities strengthen the control of financial derivatives trading, retail investors withdraw and market liquidity decreases. How can the cat play without the mouse?" commented Narinder, managing director of Indian investment institution SKI Capital.