Ananth Narayan, a whole-time member of the Securities and Exchange Board of India (Sebi), highlighted a significant mismatch between the demand and supply of securities at FICCI's 21st Capital Market Conference in Mumbai.

According to Narayan, the annual net demand for securities from mutual funds, domestic institutional investors, and individuals in the secondary market has reached Rs 3.1 lakh crore over the past three years.

This demand significantly exceeds the Rs 2 lakh crore yearly issuance in the primary market, which includes IPOs, FPOs, Preferential Allotments, QIPs, Rights Issues, and OFS.

Narayan warned that this prolonged mismatch could lead to asset price inflation rather than actual capital formation.

Narayan also drew attention to the trading of index options, particularly near their expiration dates, comparing it to a casino slot machine where individuals gamble small amounts hoping for substantial profits.

On expiry day, the time value of option premiums drops, allowing speculators to trade with minimal capital.

This results in a surge of trading activity, raising concerns about market stability and potential manipulation.

Despite fewer individuals trading in futures compared to options, the SEBI F&O study of January 2023 revealed that average net losses are almost identical in both futures and options, highlighting the inherent risks of derivatives trading.

Addressing the issue of volume discounts on exchange fees in FY24, Narayan noted that trading members collected around Rs 2,700 crore more from investors than they owed to the exchange.

This created incentives for brokers to promote higher trading volumes. Although this issue has been resolved, Narayan emphasized that it should ideally have been managed by market participants without SEBI's intervention.

He likened a self-regulating market ecosystem to regular health checkups that reduce the need for medical intervention, suggesting it would minimize the necessity for SEBI's involvement.

Narayan concluded by stating that the expert working group for F&O, along with the secondary market advisory committee, will continue to address structural issues in the derivatives markets.

This includes ensuring accurate measurement and monitoring of risks and maintaining a balance between underlying cash and derivative markets.

The committee remains open to suggestions to improve market operations.