How will intraday leverages being reduced effect traders, brokers, & exchanges?

I am tracking the market activity and social media very closely after the reduction in Intraday leverages. The sentiment from one section seems to be that this will be very bad for everyone. What is your view on this @nithin

Positive or negative for traders?
Positive or negative for brokerage firms?
Positive or negative for the exchanges?

I have read this post, so understand that the current intraday leverages will get halved by September. So my question isn’t just about what is happening today, but also post September.

Effect of reduction of intraday leverages in the near term

Trading volumes are bound to dip. Almost 50% of all trading on the exchanges are from retail traders and investors and the majority of that is intraday trade. Even in the non-retail bit, there would be some effect of this. Today March 15th was quite a volatile day but at Zerodha our trading volumes compared to a similar kind of day pre-March were at least 20% lesser.

When trading volumes dip, the impact cost goes up. Impact cost is how much you lose to the market when you place a market order due to the bid-ask spread. The problem with impact cost going up is that it can have a snowball effect. Impact cost increasing further reduces trading volume and hence making the impact cost even larger. Trading volumes or liquidity being lesser also means that markets tend to move in a jagged fashion - sharp moves up and down due to large orders being placed. I guess we are already starting to see this happen and will take some time for the markets to adjust. So yeah, near term pain for Exchanges, Brokers, and traders.

This is how trading volumes look pre-March to post-March as of 15th March.

As expected, futures are the most hit. The issue with customers moving from futures to options is that options (buying options) are much riskier.

Effect of reduction in intraday leverage in the long term

The best-case scenario is that with lesser leverage, the odds of a trader profiting/surviving go up significantly. Historically our industry has had the problem of very shallow retail participation in terms of the number of active traders. I’d fathom a guess of fewer than 10lk customers at any point, even when the industry might have added a lot more customers. The reason being for every 1 new customer getting added, maybe 1 stops trading (losses). So the net customers actively trading has remained the same. By actively trading I mean customers who trade frequently in stocks, intraday, & F&O, not equity investors.

So with lesser leverage, more traders survive, and hence the size of this industry by the number of participants will go up. While trading volume might reduce in the near term, the increase in the number of traders will hopefully make up for the drop in trading volumes with time. :crossed_fingers:

My stance on if there should be additional intraday leverages or not?

Here is an FAQ from both the exchanges that explain what are margins, why they are collected, etc. Margins are calculated using the concepts of VAR+ELM for equity and SPAN+Exposure for F&O. Margins are collected to ensure there is as little counterparty risk of a trader defaulting in making good if there were losses (losing more money than what he/she has). It is important that this risk is low because a bunch of traders with a broker losing more money than what they have on a black swan day can potentially bring the broker and hence the entire settlement system down. A broker is required to pay up the margin/losses to the exchange the same day irrespective of client makes good of it or not.

Last year when Crude Oil closed in the negative, many customers who were long or had buy positions lost more money than what was in their account. This was even after collecting the entire SPAN+Exposure margin. Thankfully this was the time when due to lockdown restrictions MCX was closed by 5.30 pm. That day commodity brokers had over Rs 330 crores in losses (customer losses more than margin placed), it could have been Rs 3000 crores if MCX stayed open like normal till 11.30 pm. Rs 2000 crores would have been enough to bring the entire system down. So yeah, collecting margin and making sure that it keeps pace with change in volatility is super important.

Anyways, the main input to calculate margins is volatility, the higher the current volatility more the margin. In the case of SPAN+Exposure, along with volatility the time left to expiry also makes a small difference. The longer the time left for the expiry of contracts, the more the margin. One input that doesn’t get into this margin calculation is whether a position is intraday or overnight. As you would imagine the volatility within a trading day is usually much lesser than the volatility of trades held overnight. So technically if a trader is saying that the trade is not going to be held overnight (using intraday product types like MIS, CO, etc), then those are a lesser risk. In which case, there is an argument to be made that margin required for such intraday trades could be lesser than overnight trades.

How much lesser could the margins be for intraday?

We could use the same volatility calculations to determine VAR+ELM or SPAN+Exposure for intraday trades based on historical intraday volatility. My guess is that it will be at least 50% of overnight margins or around what the current intraday leverages are.

But yeah, all of this was put across as a request by the broker associations and exchanges to SEBI. I guess SEBI opted to look in for the longer-term benefits more than the shorter-term potential pain.


How will the reduced leverages make a trader profitable? They may survive a few more weeks if they stick to equity but as more and more are shifting to buying options I think their capital will wipe out even faster than before. Maybe there could have been a better solution to reduce risk but SEBI doesn’t want to think much and they didn’t even ask the opinions of retail traders before enforcing this law.

@nithin please Request Sebi to Keep Atleast 10x
I.e 50 margin for Intraday Cash As it is Less risky
COME ON You are CEO of India’s Largest Retail Brokering company Please do something

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The thing is when broker provides full margin to exchanges with his own capital then where’s the systematic risk.

Coming to more of systematic risks, what if I sell hundreds of lots of April expiry and hedge by going long on March expiry and don’t touch the position till mach expiry. What’s if there’s a gap on next Friday. I don’t think any brokerage including Zerodha has proper risk management regarding this for themselves and moreover their clients .

Does sebi committee have effective representatives who have good experience (practical) in terms of trading ,investment management etc in Indian as well as global markets

Then why the more margin is taken than the total risk of option hedge strategy like iron condor, spread
In spread the total Loss was 5000 and total profit was 3000 and you collect margin around 30000 why?

Why would new traders participate when margins are high?

Why are we assuming that new traders will jump in when the risk has just gone up?

if anything we will lose more existing traders due to higher volatility. they are more likely to blow up their accounts due to higher volatility.

correct me if i m wrong.

New traders will participate with less capital and lesser leverage.
They will start learning by losing less money compared to new traders of previous years.

Nithin sir as you have said that customers are moving from future to option trading for peak margin why option buying is much more riskier than future

Assume you have Rs 1.5lks, you can buy 1 lot of Nifty future which will give you an exposure to say 75*15000 or Rs 11.25lks of Nifty. Assume instead you decided to buy options. With Rs 1.5lks, you can buy 20 lots of options trading at Rs 100 or you essentially take an exposure of 20 times Rs 11.25 of Rs 2 crores+. With options you can lose your entire capital with a small 100 point move against you, with futures a 500 point move against you will only cause you a loss of Rs 35000.

I am talking all of this in the context of buying/long options. Shorting options is of course safer than futures, but the upside is limited and requires as much margin as futures.


If margins are higher, the first reaction will be to reduce the trading size right? Also new traders by definition are new, so they wouldn’t even know what is intraday leverage and all. I don’t think this regulation will affect new traders, it will affect existing ones who are used to a certain way already.

Check this, we have spoken about this multiple times in the past.

I know some of you might have expected even lesser margin requirements for hedged positions, but as I have mentioned earlier - there are execution risks involved as well (client exiting the long options portion of the strategy and hence ending up holding the short positions with unlimited risk with very little margin).

If a broker is providing capital, this means indirectly now the broker is having a position in the market right (all positions where clients lose more than their own capital essentially belongs to broker)? And technically large market moves can erode more than brokers own capital and hence risking other clients capital lying with the broker.

Hmm let’s leave it. I want to ask something different do you think increasing illiquidity, impact cost will bring more inefficiency in markets which will result in providing more trading opportunities to exploit them.

So I’m in contact with a broker that told me that they are providing margins as usual even after the peak margin reporting came into play. They are a traditional local broker from South (won’t take name).

How are they able to bypass this rule set by SEBI?
I know it violates the law but how are they bypassing the 5 times checking happening in a day?

@nithin @siva @ShubhS9 @Bhuvan Would love to hear it from you guys.

Maybe he is lying or was not communicated with you properly. Everyone has to stick to this, maybe you can ask him if he mean margin funding for equity buying or using NBFC to give loans which also been stopped recently.

I don’t think there will be pricing inefficiency, today if there is any mispricing, you have algorithms jumping in and fixing them immediately.

what type of algorithms ?