When you buy stocks with us, you pay entire money upfront. So there is no risk that we carry on those. They will never ever be squared off. Risk management comes in when the client brings in risk on the table - essentially futures and options and intraday equity where a person is trading with a leverage of upto 30 times.
If a client has bought a stock at 100 with 30 times leverage, if the stock move 3.3 % against him, the client is out of the money and will start making losses more than account balance. The risk management job is to ensure that doesn’t happen. To close the positions much before client can lose more than what they have. If we don’t do it, it is a systemic risk for the rest of our clients.
If position is not closed when one is short of money and in case he lost more money than what he has even then broker is entitled to cover up for that loss. Imagine on any black swan event day when markets(indices) moved up or down by for ex 5%, many would end up making losses, if our risk management team is not quick enough to close their positions before their losses are more their capital then broker has to cover up for those, so broker can go bankrupt in case losses are beyond his capacity to cover, these losses are covered from other clients cash component who even don’t hold any position, in this way bad risk management (setting up leverages / timely square offs etc) can take entire broker down along with all his clients.
Thanks for your reply.
So, would this look like a typical bankruptcy case when all the assets are liquidated and the liablities are settled? But isn’t the clients money also a liability for a broker that has to be paid by him. And what will happen to the clients’ positions in equity as well as derivatives? Would they also be liquidated without any pay to them?
We can’t predict what can happen next movement in markets so, brokers will have a policy in place. So they will act according to that policy, case by case is not differentiated.
But if broker is bankrupted what he can do. Investor protection fund is there to protect investors up to 15 lakhs in case of these systemic /fraud events.
Nothing should happen to equity if they are in Demat under your name.
Using other clients cash to payoff liabilities incase of bad risk management is scary indeed… Would pledged securities of other clients also be at risk in such a scenario!? @siva@nithin
Imagine IF there is NO BROKER and trader directly connected to NSE no middleman only CLEARING MEMBER require.
Actually what broker do can be handle by NSE . (I don’t know deeper but hope)
How with out brokers client can be connected to exchange directly? only option is to buy membership on exchange and appoint clearing member, which can cost up to 1 crore per individual, which is pointless for retail traders.
There is something called risk reduction mode which will be activated when broker hits 90% of his limits placed at exchange, if that is in set one can’t place new orders through that broker and only to close existing positions one should enter trades.
The issue has been dealt with NSE arbitration panel which found Zerodha guilty. They Zerodha appealed, the appeal panel again found Zerodha guilty of unauthorized trade. Zerodha again trying to litigate the matter in court witout providing relief to the client.
@nithin Zerodha squares-off largest (78000 units of TATAMOTORS) unauthorized trade within 15 minutes of trade day while client got T+1 days. This caused the client a total loss of 84 Lakhs within a single transaction. The entire fault is due to Zerodha’s liquidation.
The issue has been dealt with NSE arbitration panel which found Zerodha guilty. They Zerodha appealed, the appeal panel again found Zerodha guilty of unauthorized trade. Zerodha again trying to litigate the matter in court witout providing relief to the client.
The compalint has been filed in the consumer forum for further resolution.
The government and SEBI oftenly request the investors to be careful and again requesting everyone to Beware from such Companies. You can buy daily stuffs online, where major risk is not involved. But when it comes to Finance, you should not rely on such online companies. Do not put your hard earned money in such companies.
In view of what happened with Karvy, this issue though clarified earlier by Zerodha has been surfacing again. I’ve received posts in WA that Zerodha has lost this NSE arbitration case etc. It may be usual fake post but hope things are ok.
Well, all I would like to say is that you will hear what you wish to. In google, if you add cheating followed by any of your favorite company’s names say amazon, Rolex, Ferrari … you ll get hundreds of fake news and posts which are related to those companies. All i would like to add up is fake news publishers have to come up with something new. May be these posts can be posted under stock market humor
In my case Zerodha RMS didn’t able to buy share which I short sell and fall short delivery, they said it hits upper circuit the very next day, but share were trading till 3:04 next day. I have been suffering from last 1 month but not getting any resolution. I am suffering a loss of 40.5 lakhs and dying inside.
. Thanks
