Tough times for scalpers, arbitrageurs & HFT firms as STT hike in F&O will hurt volumes

Brushing off the confusion around the new tax amendments, the government later today said it has hiked the securities transaction tax (STT) by 25% on sale of options and futures contracts.

The STT on selling options has been increased to 0.062% from 0.05%.

In absolute terms, the STT on the sale of options has been hiked to Rs 6,250 on a turnover of Rs 1 crore against an earlier applicable levy of Rs 5,000. On the sale of futures contracts, the STT has been hiked to Rs 1,250 on Rs 1 crore of turnover against the earlier levy of Rs 1,000.

Let’s understand how this change in taxation will impact the derivatives market and who will be affected the most.

The hike in STT will impact intraday options writers the most owing to the increased cost. Scalpers, arbitrage houses and high-frequency trading or HFT firms will get hit the most, according to market insiders.

More than 90% of the volume in the Indian Market originates from Scalpers, Arbitrage houses and HFT firms.

“Rise in STT on F&O trading is going to further dent the morale of high-frequency F&O traders that will in turn have a negative impact on F&O trade volume, thereby increasing the spread for retail investors,” said Arvinder Singh Nanda, Senior Vice President, Master Capital Services.

Shrey Jain, Founder and CEO of SAS Online, said for scalpers, arbitrageurs and HFT firms, the transaction expense will go up by 25% and directly impact their margins and bottom lines.
The amendment to the Finance Bill will have significant structural changes to the way investors invest, believes Srikanth Subramanian, CEO of Kotak Cherry.

Explaining the impact of the STT hike in futures, Zerodha co-founder Nikhil Kamath said if an intraday retail trader buys and sells 10 lots of Nifty futures, he has to pay Rs 855 in STT or 1.7 points on each Nifty lot, if he trades 10 times a day, he has to capture 17 points of a Nifty move every day on STT alone.

"This is outside of exchange charges, stamp duty, GST, brokerage, and Sebi charges. Adding all this, he has to capture 30 points between Nifty volatility daily to break even (10 trds/day)," he tweeted.

All in all, the announcements turned it to be a Black Friday for the markets, particularly when the overall sentiment is already muted by the global turmoil. .