India's leading stock exchanges have enjoyed years of rapid profit growth on the back of booming options trading, but a fresh regulatory move by the central bank could put a dent in that momentum. According to a report from Dolat Capital, new margin funding rules from the Reserve Bank of India could shrink average daily turnover in options by as much as 20 per cent by FY28, as proprietary traders find it costlier to fund their leveraged bets.
How exchanges built their profit engine
Over the past several years, exchanges have posted strong profitability growth, powered mainly by a sharp jump in index options trading volumes. The report notes that this growth has come alongside strong operating leverage, meaning revenues have risen faster than costs. Exchanges have also broadened their revenue base beyond options trading, adding businesses such as colocation services, clearing operations and mutual fund transaction processing to reduce their reliance on any single income stream.
Why the RBI's new rule matters
The RBI's latest regulations restrict how much leverage trading firms can draw using bank guarantees, a funding route long favoured by proprietary desks because it is cheap. Dolat Capital's report points out that the alternative, borrowing through commercial papers, costs roughly 11 per cent, compared with about 1 per cent for bank guarantees. That gap of roughly 10 percentage points makes many existing trading strategies far less profitable, and the report expects it to push some proprietary participants out of the market or shrink their trading size.
"We expect a decline in volumes from our base case estimates across exchanges based on the proprietary book contribution and the exposure to bank guarantees," the report said.
NSE's exposure to proprietary and HFT trading
Proprietary traders, including high-frequency trading firms, account for more than 45 per cent of trading volumes in the National Stock Exchange's index options segment, a segment that contributes about 53 per cent of the exchange's total revenue. The same category of traders makes up around 28 per cent of stock futures volumes on the exchange. Given this heavy reliance on proprietary flow, Dolat Capital expects average daily turnover in options to fall 8 per cent in FY27 and 18 per cent in FY28, while futures turnover could decline 3 per cent and 6 per cent in the same two years respectively.
BSE faces an even sharper hit
The report found that proprietary traders and HFT firms are an even bigger presence on the Bombay Stock Exchange, accounting for more than 50 per cent of its index options trading volumes, a segment that generates around 60 per cent of the exchange's revenue. Because of this concentration, Dolat Capital's projected decline for BSE is steeper than the one estimated for NSE.
