The government hiked the securities transactions tax, or STT, on the sale of futures and options in the Finance Bill passed in the Lok Sabha on Friday.

For sale of futures in securities, the STT rate has been increased from 0.01% to 0.0125%, which translates to an increase of 25%. This means that for a trade value of Rs 1 crore, an STT of Rs 1,250 will be payable from April 1 this year as against Rs 1,000 payable earlier.

The STT on the sale of options has been increased from 0.05% to 0.0625%, also translating to a 25% increase. This means an STT of Rs 6,250 on trade value of Rs 1 crore instead of Rs 5,000 earlier, which has been in force since the commencement of Finance Act, 2016.

Industry players had batted for an increase in STT rates on options trading in the equity derivatives segment ahead of this year’s Budget.

Trading in the options segment of the exchanges has touched a record high in the past year amid an uptick in margins in the futures segment, increased activity from algo traders, a weekly expiry cycle and the entry of new traders in the aftermath of the Covid-19 pandemic.

“High cost of transaction on equity and commodities trades may lead to a drop in volume and liquidity. This will increase the impact cost and is a dampener for hedgers. The steep increase in STT on options and futures will affect the volumes of high frequency trading (HFT) players in the short term. They will have to tweak their strategies to adjust higher STT and impact cost,” said Narinder Wadhwa, president, CPAI.

The cost of operations of foreign portfolio investors that do HFT trades will go up as well.

“For scalpers, arbitrageurs and HFT firms, transaction expense goes up by 25%, which directly impacts their margins and bottom lines,” said Shrey Jain, founder and CEO, SAS Online.

He added that more than 90% volumes in Indian markets originate from scalpers, arbitrage houses and HFT firms, and an increase in their cost of trading may impact overall volumes and widen spreads for retail investors.

According to Nikhil Kamath, co-founder at Zerodha, 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. 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 trades/day).

“If someone is profitable after all this, they pay the maximum income tax rate. We then wonder why many traders find it hard to be profitable. A robust and liquid stock market is cardinal to our economy; the small guy helping make this happen should also be helped,” Kamath said in a tweet.

A recent study by the Securities and Exchange Board of India (Sebi) showed that the number of individual traders in the equity F&O segment rose 500% to 4.5 million at the end of FY22 from 710,000 during FY19. What’s more, 90% of individual traders in this segment incurred net losses.