Regulatory reset may weigh on Indian exchanges as costly funding hits proprietary trading volumes: Dolat Capital
New Delhi, July 19
Indian stock exchanges could face pressure on trading volumes and earnings in the coming years as revised regulations on margin funding raise financing costs for proprietary traders and high-frequency trading firms, potentially weighing on the sector despite strong long-term growth prospects for India's capital markets, according to a research report by Dolat Capital.
The brokerage expects the new regulatory framework to moderate proprietary trading activity, with the impact likely to be most significant for exchanges with high exposure to proprietary books.
According to the report, bank guarantees previously enabled proprietary desks to leverage their market exposure. However, revised RBI norms have curtailed this route, forcing traders to increasingly rely on commercial papers and other higher-cost funding sources.
The report said the cost of funding could rise sharply from around 1 per cent through bank guarantees to nearly 11 per cent through commercial papers, making several trading strategies less viable. This, coupled with higher trading costs following an increase in the securities transaction tax, could lead to a moderation in proprietary trading volumes.
Dolat Capital estimates that proprietary books, including HFTs, account for more than 60 per cent of NSE's index option volumes and over 50 per cent of BSE's equity derivatives volumes. It expects NSE's options ADTO to decline 8 per cent and 18 per cent from its base-case estimates in FY27E and FY28E, respectively, while BSE's index options ADTO could fall 10 per cent and 20 per cent over the same period. For MCX, the brokerage expects a 6 per cent and 13 per cent decline in options and futures ADTO.
Despite these near-term risks, the report acknowledged the structural growth story of India's capital markets, supported by rising retail participation, increasing demat accounts and a shift in household savings towards equities and mutual funds. The investor base at NSE has crossed 130 million, while equity and mutual fund investments accounted for about 15 per cent of household savings in FY25, up from 8 per cent in FY24.
However, Dolat Capital believes current valuations do not fully reflect the emerging regulatory headwinds and has therefore adopted a cautious stance on the exchange sector.
— ANI
Reader Comments
Honestly, maybe this is good for the market. High-frequency trading (HFT) and proprietary desks have been eating up profits at the cost of retail investors. If volumes come down from 60% to even 40%, we might see healthier price discovery. The report says STT is also up - that's a double blow. But India's capital market story is strong, with SIPs hitting ₹20,000 crore per month. I'm not too worried long-term.
Typical regulatory overreach! The RBI and SEBI need to understand that proprietary trading provides liquidity. If you push them out, retail investors will suffer with wider bid-ask spreads. The report estimates 8-18% decline in options volumes - that's significant for NSE and BSE valuations. The market is pricing in this risk, but the question is whether SEBI will provide some transition relief. Let's see what the Budget brings.
The structural growth story is undeniable - retail participation is at 15% of household savings. But valuations are definitely stretched for exchanges. P/E ratios of 40-50x for NSE? Even with 130 million investors, that's pricing in perfection. The regulatory reset shows that HFTs had a free ride with bank guarantees at 1% funding. Now at 11%, strategies that relied on leverage will become unviable. Healthy correction incoming. 🤔
MCX also getting a 6-13% hit is interesting. Commodity markets are still developing in India. The report is right that current valuations don't reflect these headwinds. As a long-term investor, I'm cautious on exchange stocks for now. Better to wait for the dust to settle after the next two quarters when we see actual volume data. The retail shift from gold to equities is real, but regulatory friction can slow things down.
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