On 18 April, Mint reported: Want to trade in derivatives? Take an exam. Also, prove your net worth is high enough to stomach the risks. That, in essence, is what a possible entry barrier to derivatives trading could look like as regulatory concerns continue to play out over the risks of retail investors trading in futures and options contracts.
Whenever we see ideas for regulating rampant speculation such as these, we wonder if history has taught us any lessons. In my opinion, what all these new regulations do is either of these…
One, increase mindless online disclosures that are done as part of the process. Like, every few months the broker asks us to confirm our net worth…and like robots we do check and confirm! I wonder if that helps the regulator achieve its purpose, or the broker…or even us!
Two, boost income streams for bodies that conduct examinations required as part of various regulations. We think, if the exam is mandatory, then first, it needs to go way beyond theory, and second, perhaps, it needs to be free. With investor protection fund coffers overflowing, this is a no-brainer. Either way, despite all the examinations for markets participants, we have still ended up where we have, i.e. the stock market has become a gambler’s den.
It’s time to think out of the box when it comes to regulation. Here are some top ideas for putting an end to this mindless gambling.
First, intra-day futures and options (F&O) trading should be taxed punitively. Second, brokers already decide who can trade, and to what extent. Since they are closest to the customer, you want them to carry all the liability (which they already do I guess) and more responsibility. So, if a broker is pushing the idea of trading, and say encouraging leverage beyond reasonable limits (by whatever means), it needs to be held responsible. The Reserve Bank of India, which sets the guardrails for banks and non-banking financial companies, always steps in when it sees that there is deviation or even a trend that does not seem to be headed in the right direction. Perhaps, the stock market regulator needs to adopt the same approach.
Third, the stock exchanges, which are listed or will be soon, are aiming to maximize profits. There’s nothing wrong with that. But the way they go about it is what matters. The easiest way to do this is to make trading easier. I am not talking about speed of execution here. I am referring to efforts to increase volumes by lowering the hurdles to trading (lower contract sizes), or perhaps even, lowering the cost of trading. If I had a say, and had to make a choice, this is where one needs to start to put an end to all the mindless gambling.
In case of both the brokers and the stock exchange, it’s the laser sharp focus on profits that can get us all in trouble. Especially those who fall for the quick profits idea.
Fourth, hedging positions should be allowed. This was meant to be the main purpose of futures and options (F&O) trading! I am sure we can find the right technology solutions to make this seamless. We can land a rocket on the moon, so we can definitely write code to make all this happen real time.
Our fifth and final idea revolves around the retail investor. I think it’s tough to beat the appeal of quick profits that F&O trading offers. However, we should not lose hope completely. Investor education efforts should be encouraged. Perhaps an “F&O Sahi Nahi Hai” campaign. Since the sister mutual fund campaign has worked so well that people have decided to keep sip-ping, even if they are bloated with the large number of mutual fund schemes they own, perhaps this too will have an impact.
On a more serious note, the way investor education is done, especially related to trading, needs to be completely re-thought. Now, I am not going to offer any impromptu ideas. But we are up against quick money, so we need to aim high. Maybe get everyone to stand before a movie starts and swear they will not gamble in F&O. Or something like that!
Rahul Goel is the former CEO of Equitymaster.