Regulating the Retail Options Boom

Abstract

Between October 2024 and April 2025 the Securities and Exchange Board of India (SEBI) rolled out the most aggressive package of retail derivatives curbs attempted in a major market: a package spanning weekly-expiry rationalization, a threefold increase in minimum contract size, and tighter margining and position monitoring. We assemble a 48-month panel of exchange-level turnover (April 2022 to March 2026, NSE and BSE combined) from SEBI Monthly Bulletin annexure tables and combine it with cohort-level participation data from SEBI's own studies to provide early causal evidence on the reforms. Using stock options (untargeted by the reforms) as a within-market control, a trend-adjusted difference-in-differences design implies that index-options notional turnover fell 37–43% below its counterfactual path in the six months following the first wave, while premium turnover fell far less (−13% year on year), consistent with a compositional shift away from deep out-of-the-money weekly contracts. Participation effects were large and fell hardest on the smallest traders, the mechanical incidence of a minimum contract size: unique traders fell 20% year on year, with declines of 25–36 log points concentrated in the smallest turnover cohorts (difference-in-differences estimate −47 log points, permutation-robust). We find no evidence of substitution into the cash market, which contracted alongside; substitution into products outside our panel cannot be ruled out. Aggregate turnover effects attenuate by FY2026 as activity migrated across exchanges, adapted to larger contracts, and, from January 2026, faced a rule-driven downward recalibration of lot sizes; participation effects persist through the latest available data.

In short

A difference-in-differences evaluation of SEBI's 2024–25 index derivatives curbs, using untargeted stock options as a within-market control across a 48-month NSE and BSE panel. Index-options notional turnover fell 37–43% below its counterfactual path, premium turnover fell far less, and the smallest retail traders exited hardest.

Findings

• ▪Index-options notional turnover fell 37–43% below its counterfactual path over the six months after the first reform wave; roughly a third of the raw decline reflects the concurrent market-wide contraction rather than the curbs
• ▪Premium turnover fell only 13% year on year against 29% for notional, and the premium-to-notional ratio reversed a multi-year slide: the reforms changed the composition of activity more than its economic size
• ▪Unique individual traders fell 20% year on year, with 25–36 log-point declines concentrated in the smallest turnover cohorts (cohort-level DiD −46.8 log points, p = 0.001)
• ▪No detectable substitution into the cash market: cash average daily turnover fell 9.6% year on year, statistically indistinguishable from other untargeted segments
• ▪Aggregate turnover effects proved transitory, recovering within five quarters through exchange migration and the January 2026 lot-size recalibration, while the participation contraction did not reverse