MUMBAI
:
Proprietary traders, whose cost of capital is set to rise sharply under the banking regulator’s new funding directives on capital market exposure, posted a significant increase in market share in the popular index options space.
Their gross market share based on premium turnover jumped by 230 basis points (bps) year-on-year to 49.5% in the nine months through 2025-26, according to data sourced from the country’s largest stock exchange, National Stock Exchange of India Ltd (NSE). A basis point is one-hundredth of a percentage point.
Rival bourse BSE doesn’t segregate turnover by market participants.
Interestingly, the gross market share of individuals jumped by 380bps to 39.2% in the period. Together, prop traders—who trade for themselves, not for clients—and individual traders accounted for almost 89% of the gross options premium turnover. Index options include the Nifty 50, the most liquid index contract; the Nifty Bank; the Nifty Midcap Select; and the Finnifty.
Foreign institutional investors (FIIs), domestic institutional investors (DIIs), companies and others—partnerships/limited liability partnerships, trusts, societies, etc.—accounted for the rest.
RBI diktat
The Reserve Bank of India (RBI), in its 13 February directive, stipulated new conditions that consolidate lending to intermediaries within banks’ aggregate capital markets exposure. The new rules mandate that prop traders must put up 100% collateral to secure bank guarantees for margin purposes, of which half will be in cash and the other half in cash equivalents like government bonds, sovereign gold bonds, listed equity shares, etc.
The new rules take effect from 1 April .
Earlier, a prop trader would put up 50% margin, including cash, a fixed deposit, or a personal or corporate guarantee, as collateral to secure a bank guarantee. The new rules mandate that the bank guarantee must be fully secured, sharply raising the cost of capital for prop trading, which accounts for much of the market liquidity.
Market analysts say that, rather than paying banks 100% for a bank guarantee, prop traders would be better off paying the exchange’s clearing corporation (CC) 100% margin. The CC holds the broker’s margins and deposits and guarantees the settlement of all trades on an exchange.
The new rules, alongside the hike in securities transaction tax (STT) on futures and options by 150% and 50% each in the Union Budget 2026-27, effective 1 April, are expected to dent market volumes.
“While big prop traders could access alternative sources of capital, the small and mid-sized prop brokers will be hit hardest. This will result in the impact cost (difference between bid and ask price) widening, thus making entry and exit from contracts steeper for clients,” said a broker on the condition of anonymity.
Volume cut and ambiguity
Global investment banking and capital markets firm Jefferies estimates that the new norms could slash BSE’s earnings by roughly 10%, as prop traders, already reeling from the STT hike, face surging costs from higher cash collateral requirements.
“We estimate that if 50% of prop trading volumes (ex-HFTs) are affected by the RBI regulation, it could affect 10-12% of options turnover,” the brokerage said. “This translates into a ~10% earnings impact for BSE.” HFTs refer to high-frequency traders.
Rajesh Baheti, director of Crosseas Capital, said clarity was needed on how banks would treat brokers like himself who follow a hybrid model—running both prop and trading on behalf of clients. Currently, all digital stockbrokers, such as Zerodha and Groww, and bank-sponsored brokerages offer only client broking. The rest offer a hybrid model.
A pure-play client-based broker can obtain bank guarantees by providing 50% collateral, of which 25% is in cash and the rest in cash-equivalent collateral.
