Intro: Tax treatment has never been a dampener for gamblers and speculators. Therefore, Increase in STT rate will prove a double whammy for loss making retail traders of D-Street. If our government and the regulators are keen to protect retail traders, they should ban naked derivative positions altogether.
The Finance Minister Mrs. Nirmala Sitharaman has raised STT on Futures and Options (F&O) segment. No doubt, this measure will increase transaction cost of derivative trading. Would it be able to deter retail investors from F&O segment? The answer is a big NO.
Securities Transaction Tax (STT) was introduced in the year 2004. Its rate has been increased many a times. Despite this, F&O turnover has increased multi-fold. It has been further fuelled by provision of weekly expiry. Now, retail investors have an opportunity of losing money five days a week.
Taxation has never been a dampener for gamblers and speculators. Derivative transaction is speculative trade and therefore increase in STT will not serve any purpose except boosting the coffers of the govt. A recent study by SEBI had shown that loss-making traders expended an additional 28% of net trading losses as transaction costs in FY22.
If the government and the regulators are keen to protect retail traders, they should ban naked derivative positions altogether and incentivize traders for option spreads/hedged positions.
A trader must not be permitted to buy/sell options without having underlying securities/future positions. For example, a trader must not be allowed to sell HDFC bank call options if he doesn’t have HDFC bank shares in his demat account / long position in HDFC futures. One should not be permitted to sell bank nifty put, if he doesn’t have short position in Bank nifty futures.
Retail traders generally buy options rather than selling them. They should be allowed to buy option only with a spread. It will protect them from losing money to some extent.
Aforesaid measure will not only boost volume in the cash segment but also protect retail investors from being looted by the sharks of derivative segment.
