High-speed traders made $7 billion in the Indian options market

(Bloomberg) — Algorithms helped foreign funds and their own trading desks make 588.4 billion rupees ($7 billion) in gross profits from trading Indian equity derivatives, a study by the national regulator showed of the market.

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Most of the gains came at the expense of individual traders and others, who lost a total of 610 billion rupees trading in futures and options in the financial year ended March, according to the study published on Monday.

The findings align with efforts by India’s Securities & Exchange Board to slow the rapid growth of the equity derivatives segment, where turnover reached $6 trillion in early February — larger than the nation’s entire economic output. 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 go beyond a mathematically written model,” said Karthick Jonagadla, chief executive of Mumbai-based Quantace Research and Capital Pvt. “Trading stock options is completely different and the chances of having a risk-reward ratio in your favor are slim.”

India’s derivatives market drew 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 on the wrong end of the deal.

Nine out of 10 retail derivatives traders lost money in the three-year period ended March, with the average loss per trader around 200,000 rupees, SEBI’s latest study showed. Only 1% of traders made profits of more than 100,000 rupees. Over 75% of India’s 10 million sole traders reported annual income of less than 500,000 rupees.

(Updates with analyst comment in fourth paragraph)

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