“Sebi is not against derivatives trading, but does not want short-term frenzy to overcome retail investors’ judgement,” said one of the brokers. “The regulator wanted to gauge how the index futures segment could be made more liquid, and certain tax-related issues were also discussed. These discussions were exploratory in nature, and we expressed our views.”
Jane Street allegedly made unlawful gains worth ₹4,844 crore over 21 days between August 2023 and May 2025, according to a Sebi interim order on 3 July, by taking outsized and sometimes contrary positions on index and stock futures and options to mislead market participants. The lifting of the ban is under consideration, with Jane Street having deposited the ₹4,844 crore in escrow as per Sebi’s direction.
According to the brokers, the discussions last week covered both cash market and the derivatives segment–which comprise futures and options on indices like Nifty and Bank Nifty, as well as stock futures and options–and the stock lending and borrowing (SLB) mechanism.
Email sent to Sebi went unanswered.
Derivatives street
While retail/HNI and foreign institutional investors are the main players in index futures like Nifty and Bank Nifty, the turnover of these products lags far behind index options—especially after Jane Street was barred from accessing the market—due to differential tax treatment and the risk of unlimited losses if markets move against traders. Index options are dominated by retail and proprietary traders like Jane Street because they are cheaper and more liquid than futures.
For example, the notional turnover of index options was 669 times that of index futures in June, rising to 1,062 times in just 14 days of the current month, with Jane Street’s absence partly reducing the turnover.
A futures contract facilitates the purchase or sale of an underlying stock or index at a fixed price for delivery on a future date. An options contract, on the other hand, gives a buyer the right to buy or sell an underlier at a fixed price for delivery on a future date. The option seller has an obligation to give or take delivery of an underlier.
A senior broking official attributed the relative popularity of options over futures partly to differential tax treatment. Securities transaction tax (STT) on futures applies to total contract value, while for index options it is levied on the premium, which is a comparatively smaller amount.
For instance, sale of a futures contract attracts STT of 0.02%, while options attract 0.1% on premium value. However, as the contract value of a Nifty futures contract is ₹18.78 lakh (75 shares at ₹25,033 per share), the STT payable is ₹375. On Nifty options, the premium of a 25,000 put was ₹122 per share, translating into a contract value of ₹9,150 (75×122), with an STT of just ₹9.15.
“The cheaper transaction cost is one of the reasons for making options more popular than futures. Since tax rates are decided by the finance ministry, only the government can enact relief at Sebi’s request,” he explained.
The difference in tax treatment, combined with the risk of unlimited losses with futures in adverse market direction, tends to push retail more toward options than futures.
For example, if a participant shorts a Nifty futures at 25,000 expecting it to fall to 24,800, but it rises to 25,200 instead, the loss would be ₹15,000 (200×75), versus a maximum of ₹9,150 for a buyer of a 25,000 strike Nifty put expiring Thursday.
Equity futures also see more participation in the first of the three rolling months, a matter that Sebi wishes to address, per the brokers.
Liquidity is thus highest only in the active month. For example, July Nifty contracts had 183,184 contracts open, versus 67,263 for August and just 6,057 for September, per data from NSE, which has a 99.8% share in equity futures.
Another broker agreed and said that futures volumes had declined further with Jane Street’s departure. He added that his firm had suggested “refurbishing the SLB mechanism to facilitate easier participation and liquidity”.
SLB allows participants to borrow stocks from investors to exploit arbitrage opportunities (price differences across the cash, futures, or options segments) or to simply sell a stock if one has a bearish view. Indian rules do not allow selling a stock without holding it; selling via borrowed stock under the SLB mechanism is allowed.
Stock is borrowed by arbitrageurs and small traders from retail and HNIs in exchange for a 125% margin and monthly interest of 0.5–1%. Once the tenure ends, the stock is repurchased in the market and returned to the lender, or the arrangement is rolled over.
“The SLB’s steep margin payment is one reason for lack of traction; the others are the cumbersome process, which precludes direct digital transactions and easy rollovers or exits,” said the other broker. “Until Sebi restructures the mechanism, it won’t really pick up; this is what we suggested.”
Unlike the online buying or selling of shares or derivatives, SLB transactions still require calling a broker. Arbitrage opportunities or shorting possibilities are typically communicated by the broker.
Ashish Nanda, president and head of digital business at Kotak Securities, a major SLB player, who was not aware of last week’s discussions, explained that SLBM is largely used by borrowers for naked shorting or when an arbitrage opportunity arises.
“Naked shorting isn’t easy and is done mainly through the F&O segment,” he said. “Arbitrage opportunities are not always available, and not all stocks have a lending opportunity at all times. Unless liquidity improves, SLBM may not become a large segment.”
