Retail traders provide liquidity but need guardrails, warns Sunil Subramaniam

Time of India

a day ago

"In India, all these people trade through brokers who are regulated by SEBI. SEBI must act through brokers—track investors' behavior. If someone is consistently throwing in large sums to recover losses, they should be restricted. Many of their families may not even know how much is being risked. So, brokers need to play a role—either voluntarily or through regulation," says
Sunil Subramaniam
, Market Expert.
Not once, not twice, but for as long as
markets
have existed, we know that trading, over the long term, does not create wealth. It only destroys it, causes stress, and impacts an individual's overall wealth positioning. So, if the data clearly shows that
trading
is not favorable for retail investors, why is this activity still growing?
Sunil Subramaniam:
I like that you called it 'activity' and not 'investing,' which is a mistake many people make.
I chose my words carefully. SIP is investing; trading is activity.
Sunil Subramaniam:
Exactly. What we're seeing is the gambling instinct in people. It's clear. In the absence of widespread lotteries or casinos across India, trading has become a vehicle for people to indulge that instinct. And when you look at it from that lens, in gambling, the house always wins—the casino wins, the lottery provider wins. So, it's not surprising.
Now, regarding these losses—it's not that every single trade results in a loss. Traders win sometimes, but overall, they lose more. Ask any gambler: the more they lose, the more they bet. That's the core of gambling—chasing one big trade to wipe out all past losses. That's human nature, and you can't go against it.
Given that context, two points come up. First, SEBI has been consistent in highlighting the risks and simplifying things to reduce potential losses. Around 20 lakh people have already stopped trading—from 60 lakh down to about 41 lakh. That's a positive move—a 27–30% drop. It shows that people are learning or becoming more cautious. Hopefully, next year, we'll see further decline.
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Second, we cannot ignore the Jane Street episode. Under normal circumstances, odds are already stacked against retail traders, but over the past couple of years, we've seen what could be described as price rigging—especially in the index. That's worsened the situation. Investigations have not stopped at just one player. Other HFTs are being examined too, which is encouraging.
So, next year's data may show not just fewer traders due to fear or awareness, but also a possible decline in the total losses. And one final point: we tend to treat these people as the black sheep, saying they're reckless. But they provide essential liquidity to the market. As a developing market, India still lacks deep liquidity across segments. These retail participants help build that liquidity.
Of course, we must make it safer for them. They need to understand the risks, avoid chasing losses, and practice risk management. Brokers also have a role here. Instead of banning such trading, we should focus on educating participants. Financial literacy is key. Regulators should also crack down on bad actors, especially institutions.
Yes, 91% are losing money, but the number of such participants has come down. Those who remain are typically the more aggressive gamblers, which explains why per-person and total losses have reached ₹1 lakh crore. SEBI will likely take further action. Many recent changes are still playing out. But overall, we have a proactive regulator, willing to take on big players and educate the public. There's only so much more SEBI can do, but they're doing an excellent job.
Over time, I believe more retail investors will shift away from gambling-based trading and towards informed investing. That's where AMCs and mutual fund distributors must step in. We have more than twice the number of
Demat
accounts compared to unique mutual fund folios. These people must be targeted for education—teach them that while risk exists, it can be managed with diversification and professional advice.
This is all part of a long journey. As a developing market, we will face these teething problems. But they're necessary steps toward building a healthy, well-regulated, deep capital market.
One observation—the total loss figure has actually come down in Q4. Perhaps that's due to SEBI's curbs on weekly expiries. What more can the regulator do to curb the temptation of this so-called 'activity'?
Sunil Subramaniam:
I'm currently based in
Singapore
, and here we have Marina Bay Sands—the casino. What do they do? They track people who've incurred heavy losses and ban them because their behavior becomes addictive.
Similarly, in India, all these people trade through brokers who are regulated by SEBI. SEBI must act through brokers—track investors' behavior. If someone is consistently throwing in large sums to recover losses, they should be restricted. Many of their families may not even know how much is being risked. So, brokers need to play a role—either voluntarily or through regulation.
Also, finfluencers are a big factor influencing retail traders. Regulating finfluencers and ensuring that brokers communicate risks—not just rewards—is critical. They must not oversell the idea of potential profits while ignoring the downside.
But what more can the regulator do to reduce this kind of participation from traders? Equity penetration in India is still in single digits, compared to developed countries. Yet the number of traders is growing exponentially.
Sunil Subramaniam:
I wouldn't say we need to discourage this. When capital market penetration expands, more people will come in. The issue is whether they enter as investors or as traders. That's where the challenge lies.
SEBI, just like the mutual fund industry allocates 2 basis points for investor awareness, should enforce a similar model for brokers. A portion of brokerage revenue should be used for financial literacy campaigns. Ultimately, people must be taught to enter the capital markets the right way.
Today, many enter via Demat accounts and directly into equities, only later transitioning to mutual funds. That's not ideal. Education must come first.
But curbing entry outright isn't the answer. These traders do provide liquidity. They also get to channel their gambling instinct in a regulated environment. So yes, we must regulate and guide—but not ban.
For me, financial literacy is the top priority. Secondly, SEBI has advanced AI tools—that's how they uncovered Jane Street's role. Those tools can be used to study investor behavior: how losses impact decision-making, whether risk-taking increases, etc. Understanding emotional and behavioral patterns is essential.
As a regulator, SEBI is already doing well—cracking down on institutional manipulation, reducing trading days, aligning expiry dates—all good steps. But the ultimate balance is this: bring more people into markets, but guide them to do it right—not through speculation but long-term investing.
There are no easy fixes. But we need to keep moving forward. Equity participation must increase—but so must education, awareness, and regulation.