It would be nice to allow maintaining a negative cash position on a short term basis (few days) without my positions getting liquidated by the risk team. This allows a trader to make use of an opportunity on the market while cash is earning interest in the bank account. I believe US brokerages allow you to maintain negative cash balance if I’m not wrong. It would be nice to have this here. Either a cash loan or an auto-sweep from bank account would be helpful.
Even if a broker decides to extend loans, then the real yield would be something above -7%.
On savings you would get 3% and the brokerage would charge upwards of 10% so you are actually making a loss of 7%.
Secondly, Indian regulators have now segregated funds so that is not likely to happen anytime soon.
Thirdly, brokerage being similar to a insurance business would take on more risk so any brokerage firm (Indian) wouldn’t allow it.
In the US, the stocks you own is actually not held in a demat account but with a registrar so that allows them to have flexibilities.
1 Like
For an existing portfolio of positions, provided you have sufficient margins in the form of collateral (pledged securities), broker can allow you to carry forward your position, even if the cash balance is negative. However,
(a) you will be charged interest on the debit balance
(b) you will not be allowed to take any further fresh exposure/positions
(b) is because there’s a rule from the stock exchanges that clearly spell out that no further exposure should be given until the debit balance is cleared by the client.
Brokers cannot get into funding business. Brokers cannot conduit financing of transactions either. There are very strict rules against this. The only ‘fund-able’ product available for stock brokers in India is the margin trading facility (MTF).
Even if a broker decides to extend loans, then the real yield would be something above -7%.
On savings you would get 3% and the brokerage would charge upwards of 10% so you are actually making a loss of 7%.
I’m referring to the case where you need to keep money in the brokerage account waiting for a good buying opportunity. This is true in algorithmic trading where you need to act on it quickly or the opportunity would be lost. This money could sit in the bank and earn interest (however small).
In case of negative cash balance, since it would be maintained only for a short period (few days at max) so the brokerage interest on it wouldn’t be too much.
Brokers cannot get into funding business. Brokers cannot conduit financing of transactions either. There are very strict rules against this. The only ‘fund-able’ product available for stock brokers in India is the margin trading facility (MTF).
I see. Do you believe the regulations are there for a good reason? Is it about risk or something else? I feel as long as the account holder has sufficient collateral they should be allowed to take cash loans. The net effect of this as I see it should improve market liquidity. So I don’t understand why regulations bar it. Would Zerodha offer cash loans if the regulations allow it?
What you are referring to is known as LAS (Loan Against Securities). That’s there on Zerodha Capital portal: www.zerodhacapital.com
Thanks. LAS can help but I think it involves more paperwork and active steps as opposed to an “automatic margin loan” when your cash balance goes negative. The latter is how margin loans work in US brokerages. e.g. https://www.schwab.com/margin
I am aware which is why I said Indian brokerages have less flexibility. Here everything is over-regulated. Margin loans can be categorised into 2 groups: LAS and Pledge Margin. That’s about as far anybody can go in India.