It’s now common knowledge that most Indian retail traders in the stock markets lose money, but it’s slowly becoming apparent where this money is ending up.
Foreign funds and proprietary traders made gross profits of Rs. 61,000 crore in Indian equity derivatives markets in the financial year ended March 2024, a study by SEBI has said. These large entities mostly used advanced computer algorithms to place their trades. In contrast, Indian retail derivative traders lost Rs. 61,000 crore in the same period. This indicated that the the money lost by Indian traders neatly went abroad to professional trading firms.
“Proprietary traders and Foreign Portfolio Investors (FPIs) as a class booked gross trading profits of ₹33,000 crore and ₹28,000 crore, respectively, in FY24 (before accounting for transaction costs). Against this, Individuals and others incurred a loss of over ₹61,000 crore in FY24 (before accounting for transaction costs),” the study said. “Most of the profits were generated by larger entities that used trading algorithms, with 97% of FPI profits and 96% of proprietary trader profits coming from algorithmic trading,” it added.
Even as large foreign firms made money, individual Indian traders didn’t fare quite so well. 93 percent of Indian traders ended up making losses in the three-year FY22-FY24 period. The average loss per trader for Rs. 2 lakh. The worst-performing 4 lakh traders recorded losses of Rs. 28 lakh per trader. These are staggering numbers, given how 75 percent of traders had an average income of less than Rs. 5 lakh per year.
While Indian traders are losing large sums of money trading on the stock markets, foreign firms are making merry. These firms, such as Jane Street and Millennium, use Maths and Physics PhDs to develop computer algorithms to trade the stock markets. These algorithms are run by powerful computers, which can execute trades in microseconds, and are backed by large amounts of capital. Individual Indian traders find themselves unable to compete, and are losing massive amounts of money which are pocketed by these foreign firms.
Indeed, the spotlight on the role of Jane Street and Millennium in trading the Indian stock markets had been placed earlier this year when Jane Street had sued Millennium, alleging that two of its traders had stolen proprietary data and algorithms and joined Millennium. These algorithms pertained to how Jane Street traded the Indian derivatives markets. The strategy had been extremely successful, with Jane Street earning more than $7 billion in net trading revenue in the first nine months of 2023.
SEBI’s latest study, though, has revealed how trading in Indian stock markets could be proving to be extremely detrimental to the Indian economy. Millions of Indians are taking to trading in the hope of making a quick buck, but as many as 93 percent of them are losing money. Worse, this money seems to be ending up in the pockets of sophisticated financial trading firms abroad. And this $7 billion outflow that the Indian economy is incurring each year should raise alarm bells with the government, regulators, and the investing public alike.