Proprietary traders in India, who historically contributed over half of equity options volumes and 30% of cash market volumes on the National Stock Exchange (NSE), have seen their market share and activity slump. In August, their combined share of index and stock options on the NSE fell 62 basis points month-on-month to 47.3%, the lowest in 22 months. This decline is attributed to new regulations from the Reserve Bank of India (RBI) and the Securities and Exchange Board of India (SEBI).
The RBI's new norms, effective July 1, mandate that bank guarantees for capital market intermediaries must be fully backed by collateral, with at least 50% in cash. Previously, firms could obtain guarantees with as little as 50% collateral. This has drastically increased funding costs for domestic proprietary desks, forcing them away from 1% bank guarantee fees towards more expensive Commercial Papers (CPs) with funding costs near 11%. This makes high-frequency, wafer-thin arbitrage strategies economically unviable. Additionally, the RBI prohibited banks from extending credit for proprietary trading or diverting working capital for such operations.
The SEBI also introduced a new 20-minute Closing Auction Session (CAS) for cash stocks in the futures and options basket from 3:15 PM to 3:35 PM, starting August 3, 2026. This structural change replaced the traditional 30-minute volume-weighted average price (VWAP) calculation window, severely impairing automated arbitrage desks that rely on continuous cash trading until 3:30 PM to dynamically hedge expiring derivatives contracts against underlying equities.
The combined impact of these regulations has led to a significant contraction in derivatives turnover. Average daily premium turnover (ADTO) in equity options on the NSE sank 15.7% month-on-month to $5.07 billion (₹42,332 crore) in August. The average daily notional turnover for futures and options on the NSE declined 23% to $2.2 trillion (214 trillion rupees) in July from June, reaching its lowest since February 2025. Analysts at Dolat Capital project these margin restrictions alone could depress exchange options volumes by up to 20% over the medium term. Bid-ask spreads have reportedly widened in mid-cap options and out-of-the-money strikes as proprietary market makers reduce capital.
Domestic proprietary trading firms are at a disadvantage compared to foreign players like HRT, Jane Street, and Citadel, who can access cheaper overseas funding. This may lead to foreign firms capturing a larger share of the domestic market. Industry officials express concern that despite a long track record of near-zero non-performing assets, domestic traders are being disproportionately affected, potentially shifting trading activity and profitability offshore.
