The contract that helped India become the world’s largest options market has now seen its last trading day. The National Stock Exchange of India Ltd. (NSE) is bidding farewell to weekly options on the Nifty Bank Index, a tool that not only contributed a third of the total index options volume but also changed the face of India’s financial market. As of Wednesday, the Nifty Bank weekly contract will officially be retired, all thanks to new regulatory moves aimed at slowing down the growth of an industry that has expanded over 40 times in just five years.
Back in February, options trading in India reached a mind-blowing $6 trillion in notional value — a figure larger than India’s entire economy. This surge brought in record revenues for stock exchanges like NSE and BSE, and big Wall Street players quickly took notice. However, as trading volumes grew, so did concerns that Indian households were risking savings in derivatives rather than putting money back into the real economy. After months of debate, the regulator finally acted in October, imposing rules to limit the use of equity derivatives, with the first casualty being the popular weekly contracts.
To illustrate how traders relied on these weeklies: Imagine a trader who, instead of investing in long-term stocks, would buy a weekly contract to hedge against possible swings before major events like budget announcements or policy changes. Because these weekly options were cheaper, they allowed investors to manage risk without committing huge amounts of money. Deven Choksey, managing director at DRChoksey FinServ in Mumbai, pointed out that removing these options might actually increase market volatility, as traders will have fewer tools to guard against sudden price movements.
NSE first launched the Nifty Bank weekly contract in May 2016, and its popularity surged as traders embraced shorter-duration options. Soon after, similar contracts for the Nifty 50 Index and BSE’s Sensex indices hit the market, and during the COVID-19 lockdown, the appeal of options trading skyrocketed. Stuck at home with time on their hands, millions of Indians opened brokerage accounts and tried their hand at these short-term bets, which required smaller investments than buying stocks.
This surge attracted the attention of foreign firms like Optiver, Citadel Securities, and Jump Trading, all of which expanded their footprint in India. Meanwhile, a high-profile lawsuit by Jane Street Group against former employees over a billion-dollar Indian options strategy even made waves on Wall Street. During the three fiscal years leading up to 2023, the NSE’s index options volume more than doubled each year.
But while exchanges and brokers thrived, the experience for retail traders was far less rosy. According to the Securities and Exchange Board of India (SEBI), a staggering 93% of retail traders lost money trading in equity derivatives during this boom. In response, SEBI rolled out stricter regulations, including a rule limiting each exchange to just one type of weekly option. NSE has chosen to keep weeklies on the Nifty 50, while BSE will retain weeklies on the Sensex. Other weekly contracts, like those on the Sensex 50 and Bankex, will also end this month.
The end of these weeklies is expected to have a major impact on trading revenue for exchanges and brokers. NSE’s CEO recently warned that derivatives volume would take a significant hit, and Zerodha’s founder, Nithin Kamath, estimates the changes will impact about 60% of their futures and options trading.
What’s next for traders? Rishi Kohli, managing partner at InCred Capital, predicts many will turn to Nifty 50 weeklies, Nifty Bank monthly contracts, or single-stock options. But he expects some of that trading volume will simply disappear as traders readjust to the new market landscape.
Reflecting on the change, Vivek Gadodia, founder of RBT Algo, says he’ll miss trading the Nifty Bank weekly contracts. “It was India’s first widely traded weekly derivative contract and really made its mark,” he said. This shift in India’s options landscape marks the end of an era for traders and leaves many wondering how they’ll navigate a market without their
favorite tool.