(Part 4)
SEBI Is Fighting the Gravity of Financial Markets
Markets run on a simple truth that regulators refuse to acknowledge. Money is not created from thin air. Every rupee of profit requires someone else to lose a rupee. This is not a flaw in market design. It is mathematical reality. Derivatives are pure zero-sum games. One party’s gain equals another party’s loss down to the last paisa. Cash markets approach zero-sum when you account for transaction costs and the fact that price movements redistribute wealth between buyers and sellers.
SEBI’s entire regulatory philosophy rests on denying this fundamental law. The regulator acts as if losses can be prevented through rules and restrictions. They cannot. Losses can only be redistributed. SEBI is not protecting investors from losing money. SEBI is choosing who gets to lose.
The Impossibility of Loss Prevention
Consider a simple call option transaction. A buyer pays premium to a seller. If the stock rises above the strike price, the buyer profits. The seller loses. If the stock stays below the strike, the seller keeps the premium. The buyer loses. There is no third outcome where both parties profit. The transaction’s structure makes this impossible.
Expand this to the entire derivatives market. Millions of contracts trade daily. Every winning position has a corresponding losing position. The total profit across all traders exactly equals the total loss. You cannot regulate this away. You cannot create rules that let everyone win. The mathematics forbids it.
SEBI claims its restrictions protect retail investors from derivatives losses. But derivatives losses must exist for derivatives profits to exist. If retail cannot participate as sellers, they can only participate as buyers. When retail buys calls and puts, who sells to them? Large institutions and sophisticated traders. When those options expire worthless, retail loses premium. Institutions collect it. SEBI’s protection ensures retail can only be on the losing side of this equation.
The Cash Market Illusion
Cash markets create an illusion of mutual gain. Share prices rise over time. Investors buy low, sell high, everyone profits. But this ignores the mechanism. When you sell shares at a profit, someone buys them at that higher price. If prices subsequently fall, that buyer loses what you gained. Over long time frames with growing companies, wealth does get created through actual business profits. But in the short and medium term where most trading occurs, price movements simply redistribute money between participants. The real gain remains hidden in dividend payments. Often this part is missed by all.
If SEBI truly cared about retail building wealth through “real gains,” they would encourage dividend-paying blue chip holdings and discourage speculative penny stock trading. Instead they allow unlimited speculation in cash markets (where real losses happen) while blocking derivatives (where losses could be limited through hedging).
SEBI allows unlimited participation in cash markets. A naive investor can buy penny stocks, failing companies, overvalued IPOs. They can lose their entire investment. There is no minimum capital requirement. No sophistication test. No protective lot sizes. SEBI accepts that cash market losses will happen.
Yet SEBI claims derivatives need special protection. Why? The losses are identical. A retail investor buying a failing stock loses money when it drops. A retail investor buying an OTM call loses money when it expires worthless. Both knew the risk. Both chose to participate. The difference is that in derivatives, SEBI can see clearly who profits from retail’s loss. The seller on the other side of the trade has a name. In cash markets, the redistribution is diffuse. Many sellers profit as one buyer loses. The mechanism is identical but the visibility differs.
Choosing the Designated Losers
SEBI cannot eliminate losses. They can only decide who absorbs them. Current policies make this choice explicit. Retail investors are designated losers. Institutions are designated winners.
Retail cannot access derivatives to hedge cash positions. When markets crash, retail loses in unhedged holdings. Institutions hedged with puts profit from the same crash. Retail cannot sell options to collect premium income. Institutions monopolize this strategy. When retail buys options that expire worthless, institutions collect the premium. Retail cannot use spreads to define risk. Institutions construct complex strategies that profit from retail’s limited choices.
The lot size requirements ensure this distribution. A ₹15 lakh minimum contract value means only those with several lacs of idle capital can participate as sellers. Selling options requires ₹1.5 to 2 lakh margin per position. Most retail investors cannot lock up this capital. Those who can become quasi-institutional in their resources. True retail is locked out.
SEBI calls this protection. The accurate term is exclusion. Retail is excluded from strategies that could limit their losses or generate income. They are confined to strategies where they are statistically likely to lose. Buying far OTM options has low probability of profit. Holding unhedged cash positions exposes them to full downside. These are the only paths SEBI leaves open.
The Sophistication Fallacy
SEBI’s implicit argument is that naive investors need protection from themselves. They do not understand risk. They will lose money in derivatives. Therefore access must be restricted.
This argument has three fatal flaws. First, retail investors already lose money in cash markets where SEBI permits full access. If the goal is preventing losses, why allow any participation? Second, sophistication is not correlated with wealth. A salaried professional with ₹50,000 can understand options Greeks better than a business owner with inherited crores. Lot sizes test capital, not competence. Third, other countries address this through education and certification, not bans. If someone passes a derivatives knowledge test, they can trade regardless of account size. SEBI chose exclusion over education.
The real issue is not sophistication. It is that SEBI wants to control who has access to both sides of trades. In a truly free market, retail could be sellers collecting premium or buyers paying it. They could hedge or speculate. They could profit or lose based on skill and luck like any participant. SEBI’s restrictions ensure retail can only occupy certain roles. Specifically, the losing roles.
The Hedge Denial
Perhaps the clearest evidence of SEBI choosing losers is the hedge restriction. A retail investor buys shares worth ₹2 lakh. Markets are volatile. The investor wants downside protection. The obvious solution is buying a put option. This limits losses to a defined amount while preserving upside potential. It is basic risk management taught in every finance course.
But the put option has a lot size requiring ₹5 lakh notional value. The investor cannot buy protection for a ₹2 lakh holding. The choices are either buy no protection or buy puts covering ₹5 lakh, forcing purchase of additional shares they do not want. Most choose no protection because the alternatives are absurd. When the market crashes, the unhedged investor loses money. Someone else profits from that move. SEBI ensured the retail investor could not be the one profiting.
An institutional investor with the same ₹2 lakh position faces no such constraint. They have capital to meet lot size requirements. They buy puts, limit downside, and survive the crash. The same crash that wiped out retail leaves institutions intact. SEBI’s rules did not prevent the loss. They chose who absorbed it.
The Premium Collection Ban
Selling options generates income through premium collection. It is a legitimate strategy when done with proper risk management. Covered calls, cash-secured puts, and spreads all involve selling options with defined risk. These are not reckless gambles. They are standard strategies taught in every options course globally.
SEBI’s high margins and lot sizes make this inaccessible to retail. A covered call requires owning shares and selling calls against them. If each call covers ₹5 lakh notional value, the investor needs shares worth at least that amount. Most retail investors do not have ₹5 lakh in a single stock. Even those who do face margin requirements that make the strategy capital-inefficient. Institutions face no such barrier. They collect premium systematically. Retail is excluded from this income stream.
When retail cannot sell options, they can only buy them. Options buyers lose money roughly 70% of the time due to time decay and the need for significant moves to profit. SEBI has confined retail to the statistically losing side. Institutions occupy the statistically winning side. The regulator did not prevent losses. They allocated them.
The Margin Manipulation
SEBI’s uniform margin requirements reveal the game clearly. Out of the money options have low probability of assignment. In the money options have high probability. Basic risk assessment suggests OTM options should require lower margin than ITM options. This is how United States and European regulators approach it. Lower risk equals lower capital requirements.
SEBI charges identical margins regardless of moneyness. An OTM option sale collects small premium against large blocked margin. An ITM option sale collects large premium against the same blocked margin. Any rational trader maximizes return on capital by selling ITM options. But ITM options carry far greater risk of assignment and loss.
SEBI claims to prevent speculation. Its margin structure actively encourages riskier speculation. The only logical explanation is that SEBI wants retail who do participate to blow up their accounts quickly. This validates the narrative that retail needs protection. The policy creates the outcome used to justify the policy.
The Forced Exit
Markets require losers and winners to exist. SEBI’s expiry day margin rules create a specific class of designated losers. Traders holding hedged spreads get margin relief during most of the contract life. On expiry day, SEBI removes this relief. Traders must either square off positions or suddenly provide full margin.
This creates forced selling in a narrow time window. Everyone affected must exit simultaneously. Markets know this is happening. Those unaffected by the rule, primarily large institutions with capital to absorb any margin requirement, position themselves to profit from the predictable panic. Premiums collapse as forced sellers accept any price to close positions. The institutions buy at depressed prices or profit from short positions taken ahead of the collapse.
SEBI’s rule did not prevent anyone from losing money. It scheduled the losses for a specific day and time. It made them predictable. It concentrated retail on one side of the trade and institutions on the other. The losses that had to happen anyway now happen in a pattern that maximizes institutional profit and retail damage.
The Education Alternative
Other markets address investor protection through knowledge requirements. Want to trade options? Pass a test demonstrating you understand puts, calls, spreads, Greeks, and risk management. Want to use margin? Show you comprehend leverage and liquidation. Want to sell naked options? Prove you have capital and understanding for that risk level.
This approach separates sophisticated from naive based on actual knowledge. A middle-class software engineer who studies options can access the same tools as a wealthy businessman. A rich heir who cannot pass the test stays restricted regardless of capital. The system tests what matters for success.
SEBI rejected this path. Lot sizes test only wealth. A naive investor with crores can trade. A sophisticated investor with lakhs cannot. This is not accident or oversight. It is deliberate policy to ensure only certain participants can access both sides of markets. Those participants happen to be institutions and the already wealthy. Retail is confined to buyer roles where they statistically lose.
The Fundamental Dishonesty
SEBI’s stated mission is investor protection. The unstated reality is loss allocation. Every market needs losers. Profits come from someone else’s losses. SEBI cannot change this. No regulator can. The mathematics of markets make it impossible.
SEBI calls this protection. It is the opposite. Real protection would mean giving retail the same tools as institutions. Same access to hedging. Same ability to define risk through spreads. Same capital efficiency through risk-based margins. Same freedom to be on either side of trades. If retail then loses money, that is markets working as designed. Someone must lose. At least retail would have had fighting chance.
Current policy is not protection. It is rigging the game to predetermine the losers. SEBI cannot fight the gravity of markets. Money flows from losers to winners in every transaction. SEBI has simply decided retail will be the permanent losers and institutions the permanent winners. They built the rules to make this inevitable. Then they claim credit for protecting the investors they are systematically impoverishing.
Markets are ruthlessly fair in one way. Losses and profits must balance. Everyone cannot win. SEBI’s crime is not failing to prevent losses. That is impossible. SEBI’s crime is choosing who must lose and rigging the rules to make that outcome certain.
SEBI is not fighting gravity. SEBI ensures that only retail investors feel its pull.