SEBI’s F&O Curbs Threaten Discount Brokers’ Transaction Revenue

Securities and Exchange Board of India (SEBI) measures threaten discount brokers’ transaction-led revenue because higher derivatives contract values, fewer weekly expiries, tighter margin rules and uniform transaction fees can reduce retail futures and options (F&O) activity. The clearest change reduced weekly index-derivative expiries from 18 to six contracts per month from November 20, 2024.

Why do SEBI’s F&O curbs threaten discount brokers’ revenue?

SEBI’s F&O curbs threaten discount brokers because non-assisted digital brokers are largely dependent on F&O transactions for broking revenue while commonly charging zero or minimal brokerage for equity-delivery trades. The industry analysis says that derivative-contract restrictions and revised margin requirements may reduce volumes as fewer retail clients can meet collateral requirements.

The exposure follows rapid pre-curb growth in retail derivatives participation. Individual participation in equity derivatives grew at a compound annual growth rate (CAGR) of 49.9% between March 2020 and March 2025, reaching 106 lakh investors, while cash-segment participation grew at 32.9% to 377 lakh investors. A broker earning primarily from frequent derivatives orders is therefore more dependent on F&O activity than a broker with advisory, lending or product-distribution income.

SEBI’s investor-protection objective is linked to retail trading losses. A SEBI study released on July 7, 2025 found that 9 out of 10 individual equity F&O traders incurred significant losses, while the industry analysis reports that 91% of individual equity-derivatives traders made a net loss in FY25. The source also anticipates stricter guidelines for individual investors, which could further affect F&O participation and transaction income.

Which F&O rules change retail trading activity?

SEBI’s F&O rules increase required capital or collateral for some strategies and reduce the number of expiry-day trading opportunities. SEBI increased the minimum derivatives contract value to Rs 15 lakh and disclosed a plan to set it between Rs 15 lakh and Rs 20 lakh in future. Larger contracts can require more capital for each position.

From November 20, 2024, SEBI limited weekly index-derivative expiries to one per benchmark index per exchange, cutting the total to six contracts monthly from 18. The stated purpose is to reduce speculative activity and risks from uncovered, or naked, option selling, which means selling an option without an offsetting position. For clients trading multiple weekly expiries, the rule reduces the available expiry sessions each month.

SEBI also imposed an additional extreme loss margin (ELM) of 2% on all open short-option positions on expiry day from November 2024. ELM is collateral collected to cover unusually large price movements. Calendar-spread margin benefits for contracts expiring on the same day were removed, and SEBI eliminated calendar-spread benefits for the same underlying asset with different expiry dates from February 2025 to curb excessive intraday leverage.

From April 1, 2025, stock exchanges began intraday monitoring of position limits in equity index derivatives, checking positions several times during a session. The mechanism is intended to prevent unnoticed breaches of permitted limits. Its effect on broker revenue depends on whether clients sustain their trading frequency after complying with the collateral and position-limit rules.

How does the uniform fee rule affect discount brokers?

SEBI’s uniform transaction-fee requirement can remove a cost advantage used to support low-fee, high-volume discount-broking activity. From October 1, 2024, SEBI required uniform transaction fees for market infrastructure institutions, including stock exchanges. The industry analysis says standardised fees could diminish the pricing advantage of discount brokers that previously relied on high trading volumes and lower charges.

The effect is material because the source describes non-assisted brokers as operating with thin margins and minimal human interaction. Where volume-based fee discounts had supported lower customer pricing, uniform fees can raise the cost base or reduce the capacity to absorb costs. The analysis says digital brokers may pass higher costs to users, potentially reducing the appeal of their low-cost model.

Full-service brokers are relatively less exposed, though not unaffected, because their revenue can include research, advisory, wealth management, distribution and lending. The source says assisted brokers may adjust service or advisory charges after the removal of volume-based discounts. The difference is one of revenue mix: discount brokers monetise more activity through transactions, while full-service firms have additional disclosed income channels.

How concentrated is derivatives activity in technology-led trading?

Technology-led execution makes lower F&O volumes consequential because algorithmic trading accounted for 69% of National Stock Exchange (NSE) equity-derivatives turnover in Q1FY26. Algorithmic, or algo, trading uses computer programs and predefined instructions to execute orders automatically. The algo share increased from 41% in FY20 to 69% in Q1FY26, while the non-algo share declined from 59% to 31%.

Application programming interface (API) trading allows clients to connect to a broker’s system and automate order execution. The source says APIs attract high-volume traders and increase transaction revenue, making them relevant to brokers serving active clients. However, automated execution does not remove the effect of larger contracts, fewer expiries or margin requirements because the client’s strategy still requires compliant positions and sufficient collateral.

The broader broking market remains large despite the regulatory headwind. NSE active clients rose from 108 lakh in FY20 to 479 lakh in Q1FY26, a CAGR of 32.8%. India’s broking industry was estimated at Rs 52,000 crore in FY25 and projected to grow at a CAGR of 16% to 18% over the next two to three years, although that projection does not establish transaction growth for a particular broker model.

Can funding and non-broking income offset F&O pressure?

Margin Trading Facility (MTF) is a disclosed route for brokers to diversify income because it allows investors to borrow funds to buy securities. The MTF book reached Rs 88,000 crore in June 2025, up 23.7% from March 2025, and grew at an 87% CAGR from the last trading day of March 2020 to the last trading day of June 2025. Interest income from MTF represented 15% to 35% of total revenue for leading players, according to the source.

A September 2024 SEBI policy change allowed cash-collateralised securities as MTF maintenance margin. The analysis expects the change to simplify margin requirements and support participation. MTF remains distinct from F&O margins: MTF finances securities purchases, whereas derivatives margins secure futures and options positions, so MTF income does not automatically replace lost F&O order volumes.

The source also identifies wealth management, financial advisory, mutual funds, insurance, retirement planning and loans against shares as non-broking offerings. Portfolio management services assets under management were Rs 39.3 lakh crore in June 2025, and alternative investment fund commitments were Rs 13.5 lakh crore in March 2025. A broker can benefit from those segments only if it has the products, client relationships and compliance capacity to provide them.

Conclusion

SEBI’s framework changes the economics of transaction-led discount broking by reducing weekly expiry opportunities, increasing collateral demands for certain derivatives strategies and standardising transaction fees. The greatest exposure lies with brokers reliant on F&O order flow, while firms with funding, advisory and distribution income have other disclosed revenue sources despite their own fee and compliance costs.

The next development to watch is whether SEBI implements the disclosed future contract-value range of Rs 15 lakh to Rs 20 lakh or introduces additional individual-investor guidelines after the July 2025 loss study. MTF is also a disclosed alternative growth channel following the September 2024 collateral-policy change, but its expansion would not itself restore F&O trading volumes.