Daijiworld Media Network - New Delhi
New Delhi, Feb 2: High-frequency traders (HFTs) in India are bracing for weaker returns after the Union government proposed a sharp increase in taxes on equity derivatives, a move aimed at curbing speculative activity in the world’s busiest options market.
To discourage risky trading that diverts household savings from productive investments, the tax on equity futures trades is set to rise to 0.05 per cent from the current 0.02 per cent. Taxes on options premiums will be increased by 50 per cent, while levies on the exercise of options will go up by 20 per cent. An official said the government expects to raise around Rs 150 billion annually through the proposed tax hike.
Market experts say the higher levies will significantly raise the profitability threshold for high-frequency strategies, as taxes already account for nearly a quarter of trading costs. They also warn that the move could make India less attractive for foreign investors focused on derivative-heavy strategies.
“The increased costs make it near unviable to run liquidity-providing strategies in India,” said Devansh Gupta, founder of New Delhi-based AlgoQuant Fintech Ltd. He added that the tax changes and regulatory curbs send “a negative signal to global firms”, many of which have reportedly put expansion plans in India on hold.
The proposed tax hike, aimed at maintaining market integrity, follows a series of regulatory measures taken by Indian authorities. These include extensive curbs introduced in late 2024 and a subsequent crackdown in 2025 on US trading firm Jane Street Group LLC over alleged market manipulation.
For high-frequency trading firms, which rely on massive volumes and razor-thin margins, the change significantly alters the economics of strategies built on speed, scale and minimal holding periods. HFT firms typically act as market makers or arbitrageurs, executing thousands of trades per second to profit from tiny price discrepancies.
“Effective trading costs will increase for foreign investors, HFTs and local proprietary traders,” said Tejas Shah, head of derivatives at Equirus Securities Ltd. “For HFTs in particular, this could act as a dampener until their models are recalibrated to absorb the higher costs.”
The tax proposal comes after a period of strong growth for high-speed trading firms. In the year ended March 2025, profits for market-making and algorithmic trading firms surged. Jane Street Group’s India unit reported an almost six-fold jump in trading gains before its operations were halted by the regulator in July. The firm has denied the allegations made by the Securities and Exchange Board of India. Citadel Securities India Pvt Ltd reported a 39 per cent rise in revenue to $450 million last fiscal year, while Hudson River Trading’s local unit more than doubled its net income.
Analysts say the impact will be most pronounced in the options segment, where turnover is massive and margins are thin. Short-dated contracts, popular among both retail traders and algorithmic strategies, are particularly sensitive to transaction costs. Even small increases in taxes can turn profitable strategies into loss-making ones.
“Once liquidity starts falling, it becomes a vicious cycle,” said Amit Goel, co-founder and chief global strategist at Pace Group. “Many algorithmic strategies depend on deep liquidity, and when that dries up, they also pull back.”