SEBI's new move to cut retailers participation in F&O!

[afin]

You are assuming that small retail traders are losers! I know that you intended it to be sarcastic. This is a stereotype promoted by American financial literature. SEBI has not done much ground work and just gave a questionnaire to less than 100 people/institutions and is making laws based on that. Look at the SEBI document and it shows that people in SEBI sit in their ivory towers and are bureaucrats with no trading experience. Reading financial literature and going through surveys and research papers does not provide much insight into the real life of a trader.

I will give you a small example. I keep less than 2 lakhs in my trading account. Very often, I commit about 60K for the margins and on most days I make about 5K to 9K on the trades. I am documenting my trades on this forum. Now, SEBI thinks that Big investors/Smart Money/Mutual Funds are better, show me which mutual fund can deliver me my daily returns? Simply, it is not possible to replicate this on a larger scale. I am aware of this and I prefer to be a small trader. When it comes to large investments, I can choose long term growth stocks which gave me 6 times return in 3 years in the past. I can share that data from my broker statements. India has many such small investors and traders all across this country. Though, I have not done formal research on this subject, I lived and interacted with small town traders in AP, Telangana and in the cities of Hyderabad, Chennai and Ahmedabad. An investor/trader who has taken keen interest in the financial markets would never go with mutual funds. SEBI cannot kill the entrepreneurial spirit of investors/traders in this country. As it is, we deal with extraordinary burden like STT and still survive.

I do not believe that small traders are dumb money and large funds are smart money. That is a fallacy promoted in financial literature.
I can show many counter-examples, LTCM, Bernard Madoff, Lehman Brothers, AIG, Citigroup just to name a few.
But, in a given time frame a large fund, has a better holding power than a small player. Any trader would acknowledge this.

If SEBI wants to protect small investors/traders, it should spend its time and the fees that it collects from us, on investor education programs. Actually, certifying traders is not a bad idea. But looking at the quality of education in our country in different fields, I can only tell that a certificate is only as good as the quality with which it's underlying education is imparted.

You hit the nail right on top. A sample of 100? And they base a policy recommendation on that miniscule a sample.

The question now is even if sebi goes ahead with this ridiculous rule, how do they plan to implement it? There simply is no thought to it at all. Sir I think we must focus on building our arguments into a coherent structure that can be forwarded to sebi and copied to those who can probably represent on our retailers behalf.

On top of my mind I can think of one hard hitting point. I had pasted it elsewhere. Currently on way to work and I should be able to repost the same here once I am in front of a computer.

 

[afin]

That's exactly how I leverage my swing trades by judging IV. At times I go for correlated liquid stock options as well; exit using strict stop-loss if wrong, and if right simply trail the stop-loss until kicked out. For several days now, unable to pull the trigger because SEBI has added an extra veil over my rationale mind.

I use Amibroker. Without any programming background reading the manual line by line, coding my strategy in AFL took me 3 years (still in progress) - over 7000 lines. I am very compassionate about trading, because despite of initial losses, trading has made me become aware of my true potentials. I have become a different person in these years - I can mentally calculate better, has turned more vigilant on several aspects, my perception of reality has tremendously improved, I have become more goal-oriented, organized. These are all gifts of trading.

Moreover, anybody serious about trading, goes through the same phase. It's common to feel the pain while acquiring new skill sets. SEBI as a regulator must motivate, instead of bullying.

True that. It took me 3 years of losses to arrive at where I am now - the learning curve is exponential and the experiences have taught me hard lessons. I like solitary activities and after research, trading was the one activity that was not only intellectually stimulating but also rewarding. Just like a student has to go through 3 to 4 years of graduate education, followed by 2 years of post graduation, I also spent my time -making a lot of errors initially, learning from it and finally finetuning it and honing it somehow. Trading is bound to happen by encountering losses - these are feedback systems that teach us a lot. What SEBI is trying to do here is to take away that element of learning from a probable new beginner and sanction the person heavily for even attempting to trade. This cannot be allowed to happen. Trading cannot be the esoteric preserve of an elite bastion of people.

 

[afin]

You hit the nail right on top. A sample of 100? And they base a policy recommendation on that miniscule a sample.

The question now is even if sebi goes ahead with this ridiculous rule, how do they plan to implement it? There simply is no thought to it at all. Sir I think we must focus on building our arguments into a coherent structure that can be forwarded to sebi and copied to those who can probably represent on our retailers behalf.

On top of my mind I can think of one hard hitting point. I had pasted it elsewhere. Currently on way to work and I should be able to repost the same here once I am in front of a computer.

Point I can think of that can be added:

India's ease of doing business rank is only just improving. We were ranked 130 in 2017 and jumped to 100 in 2018 (source: http://pib.nic.in/newsite/PrintRelease.aspx?relid=173116) The current SEBI proposal goes against the tenets of the ease of doing business because trading is considered as a business. Gains from F&O trades are categorized into the "Business Income" head of the ITR form and it is done for a reason. If the current SEBI proposal goes through, it would be creating a hinderance for all the retail traders concerned, from an ease of doing business perspective. From that point alone, the move is retrograde in nature.

 

[Novice30]

Limiting access to derivative instruments is understandable but how can the regulator limit access to delivery based cash market ? This is outright draconian in nature.

Some stocks (even high quality stocks) can deliver 20/30% returns in a few months. How many mutual funds can do that?

 

[afin]

Limiting access to derivative instruments is understandable but how can the regulator limit access to delivery based cash market ? This is outright draconian in nature.

Some stocks (even high quality stocks) can deliver 20/30% returns in a few months. How many mutual funds can do that?

Even if we say 4 to 5% on average per month, which is highly achievable and using the power of compounding, we would be able to outperform the mutual funds by a country mile.

 

[NJ78]

Limiting access to derivative instruments is understandable but how can the regulator limit access to delivery based cash market ? This is outright draconian in nature.

Some stocks (even high quality stocks) can deliver 20/30% returns in a few months. How many mutual funds can do that?

The biggest problem with mutual funds is that a lot of them still follow the old buy-and-hold mindset. In an era where gold standard stocks can become junk overnight, it's a dangerous approach. Sure, a few mutual funds have been holding cash for better opportunities but it's cash that's lying idle instead of being used purposefully (say for hedging or a well-thought options trade).

The aura of unearned celebrity around some fund managers is frankly nauseating. I often see articles that boldly declare how fund XYZ lost only 15% when the market dropped by 20% in some random year. I've been investing in mutual funds over the past 3-4 years. With each passing SIP, I used to wonder if mutual funds are really "sahi". There's a saying that if you want to get something done, you've got to do it yourself. In my view, direct stock investments & trading -- if done right -- are far better options than mutual funds. No one cares more about your money than you do.

 

[hitesh05]

My simple question is can't we stop this move of SEBI by challenging in court and at least make it status quo for 3-4 years. I live in a small town those living in capital can contact any lawyer of high court or supreme court and share the view here

 

[HEM]

I am preparing for the worst and if SEBI will implement his decision then i will start new business venture...
Tea stall and pakoda ka thela ( चाय की थड़ी और पकौड़े का ठेला ) in front of the SEBI office.........

I'm just joking and trying to lighten this cumbersome and stressful atmosphere so please do not mind........

 

[afin]

The biggest problem with mutual funds is that a lot of them still follow the old buy-and-hold mindset. In an era where gold standard stocks can become junk overnight, it's a dangerous approach. Sure, a few mutual funds have been holding cash for better opportunities but it's cash that's lying idle instead of being used purposefully (say for hedging or a well-thought options trade).

The aura of unearned celebrity around some fund managers is frankly nauseating. I often see articles that boldly declare how fund XYZ lost only 15% when the market dropped by 20% in some random year. I've been investing in mutual funds over the past 3-4 years. With each passing SIP, I used to wonder if mutual funds are really "sahi". There's a saying that if you want to get something done, you've got to do it yourself. In my view, direct stock investments & trading -- if done right -- are far better options than mutual funds. No one cares more about your money than you do.

Exactly. If someone does want to invest in a mutual fund, they might as well do it in an index fund where the expense ratios are typically lower. But other than that, don't see any reason how MFs can be beneficial for DIY investors like us.

 

[Smart_trade]

Our best defence is saying that while we agree with the Govt that unbriddled speculation and excessive leverage is harmful to the investors/traders, professional traders understand risk and have experience and training in dealing with the risk. They are in this profession for number of years and they are making trading as their profession and hence some leverage should be allowed.....we may be open for gaining education such as NCFM certification,. Most important is our track record for last 3-4 years and brokers can judge whether we understand and respect risk and allow the higher exposure to us.

Another point is sample size of 100-150 is too small to get any representative indications and Govt should do this study on larger sample size...this will give us some breathing time.

Saying that this move is curtailing our fundamental right to do business will not cut ice with SEBI. SEBI is not stopping trading if one has proper capitalisation and experience in risk management. Also we cannot ask for excessive leverage saying that it is none of SEBI's business. SEBI is for orderly development of capital markets . Can a person having Rs 1 Lakh in his pocket,no proven track record, no plans of how he will repay the loan go to the bank and say that he wants Rs 1 Cr loan and bank and RBI has no business to ask him all the above and if they dont give the loan, they are violating his fundamental rights to equality with other businessmen and his right of doing business.....the banks have debt equity norms and we have to abide by those norms....so our fundamental rights irrespective of my capitalisation argument is unlikely to find favour with SEBI,Govt and even Courts.....we should also think from the perspective of the law enforcing agencies and convince them that we are genuine and we have a good case.

Just a few thoughts on how we should make out our case to find favour with the Courts.

Smart_trade