How India’s Day Traders Broke the World’s Biggest Options Market

SPEAKER_1 (0:02)

Bloomberg Audio Studios, Podcasts, Radio, News.

Rebecca Choong Wilkins (0:08)

At its very peak, how dominant did India become in global options trading?

Savio Shetty (0:13)

Oh, it was absolutely insane. There were products being introduced left, right and center.

Rebecca Choong Wilkins (0:19)

Savio Shetty is a Bloomberg reporter covering India equity options in Mumbai. He tracks derivatives trading in India, and was for a time a derivatives trader himself.

Savio Shetty (0:31)

I remember jokingly pointing this out in the actual interview, and I was told that, yes, yes, that is exactly what we are looking for. I fit the bill.

Rebecca Choong Wilkins (0:41)

India is the world's biggest equity options market by trading volume. During the pandemic, it experienced an unprecedented boom.

Savio Shetty (0:50)

Everyone thought, I'm the next Jim Simmons, I'm the next Ray Dalio, I have multiplied the money, 5x, 10x.

Rebecca Choong Wilkins (0:57)

With those retail investors came some of the world's most sophisticated trading firms, eager to cash in on a rapidly growing market.

Savio Shetty (1:06)

You had big Wall Street folks coming here and wanting a piece of the pie.

Rebecca Choong Wilkins (1:10)

And then the tide turned.

Savio Shetty (1:12)

Wall Street firms hire con traders, billions of capital, lots of other things to make money. And here you had suddenly people who had no clue what an option was on Monday, trading them on Friday. Retail traders lost billions of dollars. That billion of dollars for a country that has a current account deficit, significant strain on its currency always.

Rebecca Choong Wilkins (1:36)

The fallout was swift. With losses mounting, India's markets regulator swept in with a host of reforms.

Savio Shetty (1:43)

But I think with the way things move in financial markets, there is always something new that will come up. If you have to ask, where has the speculative gone?

It's probably gone into commodities.

Rebecca Choong Wilkins (1:59)

This is the Big Take Asia from Bloomberg News. I'm Rebecca Choong Wilkins in Forwant Ha. Each week, we take you inside some of the world's biggest and most powerful economies, and the markets, tycoons, and businesses that drive this ever shifting region. Today on the show, India's options trading frenzy. Who got rich, who got burned, and why regulating this market is such a delicate balancing act.

Savio, so tell me, as if you're speaking to probably not your grandmother, but my grandmother, in layman's terms, how does options trading actually work?

Savio Shetty (2:45)

First of all, I'll say hello grandmother. It's nice to meet you.

Rebecca Choong Wilkins (2:49)

Bloomberg Savio Shetty says it's impossible to understand India's options boom without first understanding how complicated options are to begin with.

Savio Shetty (2:59)

Derivatives have futures, they have options, they have forwards. Options are the most, I think, difficult to understand, which is why you will see a lot of financial engineers get into this.

Rebecca Choong Wilkins (3:10)

Savio and I started with the basics.

Savio Shetty (3:12)

If you take a particular sport, let's just take, for example, football, the equities trading or the trading is playing the football. Options is essentially betting on who's going to win that game. So it's a derivative based on an underlying product. That underlying product can be absolutely anything. It can be weather, equities. But at its very core, an options contract is a punt, is a risk, is a call on where do you think that asset is going to go.

Whether Spain defeats Argentina 1-0, 2-0, 3-0. You can also play a draw if you think Spain and Argentina are not going to score.

Rebecca Choong Wilkins (3:49)

In the financial market, an option is simply putting money on where the price of something will go.

Up, down, or the same. Trades also come with various layers involving timing, limits and expiration dates. You pay a small amount upfront. If you're wrong, you lose the money.

Savio Shetty (4:09)

If you win, you can win a lot. It's a leveraged product. It's probably one of the most leveraged products that there is. We've had cases in India where option prices have risen 4,000 percent in under 30 minutes.

Rebecca Choong Wilkins (4:22)

It's interesting because even for people who work in finance, this is a complex product. Trading firms on Wall Street have quants. They have specialized traders. So how did ordinary people in India get involved in this?

Savio Shetty (4:37)

I think it was the perfect storm, to be very honest. I think it's a storm right now. Indians have always shied away from the stock markets, but the population is getting younger. You have this urge to become rich that suits, I think, the gambling instinct. India has very low data prices. Reliance Jio, which is one of the world's largest telecom operator, was launched in 2016 at absolutely dirt cheap rates. So, you have a lot of people being on the internet, browsing stuff, looking at stuff, brokers who have reduced fees for trading. To give an example, Zero Da charges 20 rupees for one trade, which is probably 20 cents on the dollar. Finally, you had the pandemic.