(Bloomberg) — Algorithms helped foreign funds and proprietary trading desks pocket 588.4 billion rupees ($7 billion) in gross profits from trading Indian equity derivatives, a study by the nation’s market regulator showed.
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The bulk of the gains came at the expense of individual traders and others, who lost a combined 610 billion rupees dabbling in futures and options in the financial year ended March, according to the study published Monday.
The findings align with the Securities & Exchange Board of India’s efforts to slow the rapid growth of the equity derivatives segment, where the turnover hit $6 trillion in early February — greater than the entire output of the nation’s economy. The regulator has repeatedly warned small investors that they are taking a big risk in trying to bet against better-funded and more experienced financial market players.
“There is little scope for individual traders to beat a mathematically-written model,” said Karthick Jonagadla, chief executive officer of Mumbai-based Quantace Research and Capital Pvt. “Trading equity options is altogether a different beast and chances of having a reward-to-risk ratio in your favor are minuscule.”
India’s derivatives market grabbed global attention in April after US-based Jane Street Group revealed that a strategy used in the country generated $1 billion in profits. The revelation also shed light on how smaller investors are often at the wrong end of the trade.
Nine out of every 10 retail derivatives traders lost money during the three-year period ended March, with the average loss per trader at about 200,000 rupees, SEBI’s latest study showed. Only 1% of traders made profits of over 100,000 rupees. More than 75% of the 10 million individual traders in India declared annual income of less than 500,000 rupees.
(Updates with analyst comment in fourth paragraph)
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