By Vineet Kumar 
SEBI’s New F&O Limits: A Game Changer for Prop Trading Firms
The Indian derivatives market is staring at a potential shake-up as SEBI’s proposed restrictions on gross position limits could force proprietary (prop) trading firms to rethink their strategies. With intraday limits for index options set at ₹1,000 crore (net) and ₹2,500 crore (gross), and end-of-day limits capped at ₹500 crore and ₹1,500 crore, the new regulations might significantly impact trading volumes, job security, and tax collections.
Prop Trading Desks Brace for a Shake-up
For prop traders, the implications of SEBI’s proposal are severe. Many firms that currently deploy ₹3,000-3,500 crore in daily derivatives trading—primarily in index options—could see their capital deployment shrink by up to 80%. Some firms may be forced to cut 20-30% of their workforce to adjust to the new normal.
“Job losses are inevitable,” admitted a senior executive at a leading brokerage firm engaged in prop trading. “We have over 2,500 people working on our prop desk. If these limits are enforced, we’ll have no choice but to downsize.”
Beyond workforce reductions, traders argue that the restrictions will discourage hedging, limit margin deployment, and reduce capital efficiency. “If we have funds and are within the margining system, why shouldn’t we be allowed to trade freely?” questioned the executive.
Impact on Trading Strategies and Market Volumes
Traders employing low-risk strategies, such as straddles, will be particularly affected. A simple straddle—buying both a call and a put option—could hit the ₹2,500 crore gross delta limit with a position size of just ₹11-12 lakh. Given that such a trade requires approximately ₹350 crore in margin, traders fear that their ability to execute these hedging strategies will be significantly hampered.
Market watchers predict that F&O volumes from prop firms and Foreign Portfolio Investors (FPIs) could decline by 50-70%, leading to a broader drop in exchange volumes by 65-70%. This could have a cascading effect on liquidity and price discovery in the market.
Tax Collections Could Take a Hit
The potential reduction in F&O trading volumes could also impact government revenues. Securities Transaction Tax (STT), GST, and stamp duty collections could drop by 40-50% if the new norms are enforced.
“The government has projected STT collections of ₹78,000 crore for FY 2025-26. However, if prop trading and FPI volumes fall drastically, STT revenues could drop below ₹40,000 crore,” warned a top broker.
The Road Ahead
While SEBI’s proposal aims to bring more stability to the derivatives market, critics argue that it may end up restricting genuine hedging activities and reducing market liquidity. The industry is now awaiting further clarification, hoping for a balance between risk management and trading freedom.
With potential job losses, declining tax revenues, and a major shift in trading strategies, the question remains: Is SEBI’s move a step towards market stability or an overreach that could stifle India’s thriving derivatives ecosystem?
Stay tuned for more updates on www.tradingthought.com as the story unfolds.