India's stock market has become an options market: Jefferies

India's stock market is increasingly being driven by derivatives rather than traditional cash equity trading, fundamentally altering the business model of the country's exchanges and weakening the historical link between market performance and exchange earnings, according to a report by Jefferies.

The brokerage said India's equity options market has expanded at a compound annual growth rate (CAGR) of 56% between FY20 and FY26, far outpacing the 19% CAGR recorded by the cash market. As a result, derivatives now account for nearly 70% of operating revenues for Indian exchanges, making volatility—not necessarily rising stock prices—the biggest driver of exchange earnings.

Volatility, not market direction, is driving exchange revenues

Traditionally, exchange revenues were closely linked to market performance, with higher cash market volumes during bull runs translating into stronger earnings. However, Jefferies argues that this relationship has weakened as options trading has surged.

Unlike cash market trading, options activity tends to increase during periods of heightened uncertainty and volatility, irrespective of whether markets are moving higher or lower. This means exchanges can continue to generate robust transaction revenues even during volatile or declining markets, provided trading activity remains elevated.

The report noted that options premium average daily turnover (ADTO) in India has grown to nearly 70% of the daily cash market turnover in FY26, stressing how derivatives have become central to market activity.

NSE dominates an increasingly diversified exchange business

Jefferies said the National Stock Exchange (NSE), which has filed for a public listing, is the biggest beneficiary of this structural shift.

The brokerage estimates NSE accounts for nearly 70% of the revenues generated by Indian exchanges and enjoys over 90% market share across most trading categories, including cash equities, equity futures and clearing services. While transaction charges remain its largest revenue source, the exchange has also built a sizeable technology and data business, which contributed around 13% of operating revenue in FY26.

According to the report, equity options alone contributed 77% of NSE's transaction revenues during FY26, indicating the growing dependence of exchange earnings on derivatives trading. At the same time, the exchange is expanding its presence in commodity derivatives and technology services, bringing its business model closer to leading global exchanges such as Nasdaq and CME.

India trades more contracts, but remains smaller than the US

Despite concerns over the rapid growth in retail derivatives trading, Jefferies said the size of India's options market is often misunderstood.

While India trades four to five times more option contracts than the United States, the value of premiums traded is only about one-fifth of the US market. The difference is largely because Indian markets see substantially higher expiry-day trading and smaller ticket sizes.

The report also noted that retail investors with annual option turnover of less than ₹1 lakh account for roughly 35% of option traders, but contribute less than 1% of NSE's turnover, suggesting that the bulk of trading volumes continue to come from larger and more active market participants.

Regulatory changes temper growth outlook

The brokerage expects options trading to remain a key earnings driver for exchanges, although growth is likely to moderate following a series of regulatory measures introduced by the Securities and Exchange Board of India (SEBI).

Over the past two years, the regulator has increased securities transaction tax (STT) on derivatives, restricted weekly index option expiries to one per exchange, increased lot sizes and tightened surveillance of derivatives trading. Looking ahead, Jefferies said that NSE's DRHP projects equity options to grow at a relatively modest 9-11% CAGR between FY26 and FY30, slower than cash equities, which are expected to grow at 14-16%, and commodity options, where growth is projected at 20-25%.