Markets reel as proposed STT hike on futures sparks heavy sell-off, dragging Sensex down over 2,000 points before a partial recovery. (File)
The government has proposed a hike in the Securities Transaction Tax (STT) on futures and options trading to rein in unbridled speculative activity in the segment, triggering a sharp sell-off that sent the benchmark Sensex plunging more than 2,000 points at one stage but recovered partially later. In a move tantamount to tightening restrictions on futures trading, the STT on the sale of securities futures will be raised from 0.02 per cent to 0.05 per cent of the traded price.
It means that for every Rs one lakh worth of futures sold, traders will now have to pay Rs 50 in STT, instead of the previous Rs 20.
The Sensex plunged by 2259 points to 80,378 on across the board selling pressure soon after the measure was announced. It was trading 80,820.56, down by 1449.22, or 1.76 per cent at 12.30 pm but recovered partially later but still trading with a loss of 841 points. The NSE Nifty Index plummeted by 2.43 per cent to 24,705.65 at around 12.30 pm IST but recovered partially to 25,020, still down by 1.18 per cent at around 12.45 pm IST. “The hike in STT on F&O has come as a disappointment. On the other hand, there is no relaxation in capital gains tax,” said an analyst.
In 2024, the government hiked STT on sales of futures from 0.0125 per cent to 0.02 per cent of the price at which such futures are traded.
The derivatives segment has been an exponential surge in trading volumes, with the majority of traders incurring losses. A SEBI study had found that close to 93 per cent, or 9 out of 10 individual traders, in the equity futures and options (F&O) segment incurred losses, with aggregate loss exceeding Rs 1.8 lakh crore between FY2022 and FY2024.
In the recent past, the markets regulator has announced a raft of reforms to strengthen the derivatives market and restrain speculative trading. These measures included recalibration of contract size for equity derivatives, rationalization of weekly index derivatives products and increase in tail risk coverage on the day of options expiry.
The increase in the STT on futures trading is likely to have a significant impact across market participants. High-frequency traders (HFTs), who rely on executing a large number of small-margin trades at high speed, will be particularly affected. The higher transaction costs could materially erode their thin profit margins, potentially making several strategies unviable and leading to a slowdown in high-frequency trading activity, according to a broking firm.
Retail traders will face higher costs per transaction, which could dent overall profitability, especially for those operating with tight margins. The increased cost burden may compel retail participants to scale back their use of leverage, thereby limiting potential returns. At the same time, this reduction in leverage could help temper excessive risk-taking and lower the likelihood of sharp losses.
Large institutional investors, despite having deeper financial resources, will not be immune to the impact of the tax hike. Higher transaction costs on futures and options positions could prompt institutions to recalibrate their trading strategies. This may include reducing trade frequency, consolidating positions, or increasing position sizes to spread costs more efficiently. Over time, such adjustments could alter liquidity patterns and trading behaviour in the derivatives market.
Curated by James Chen
