Like Siva had also said, this extra amount can be kept by the client themselves. Removing that freedom from clients who know what they are doing is unfair to them. Making sure margin is alright is part of the job…
Then why make that change now? I believe clients money is as important as brokers money. It should be same for the clients too. I don’t want my broker also to pay penalty because of me.
If I stay in business broker benefits and only if broker stays in business I can continue using his services.
Like you yourself said…
@Nithin, most peak penalties are due to intra day volatility. Can the extra margin be ‘freed up’ after the post 2 pm update, so that overnight position traders can utilize the full quota? If I’m not wrong, EOD margin shortfall is anyway borne by the client…
Though would prefer no extra margin…
Sharing something we had written for internal use. I will put a detailed blog on this. Circular is applicable for both cash and FO. But in cash there is never any margin penalty issue as the margin is a fixed 20% for intraday and for overnight anyways full money is collected.
What are the examples of upfront penalty?
We do not allow clients to enter positions without upfront margins collected. However, there are instances where the upfront margin required increases intraday due to the following,
- Increase in margin requirement due to shuffling of positions.
F&O margin requirements are based on SPAN and Exposure margins. SPAN margin is calculated on the entire portfolio of F&O positions held. Some trade positions that reduce the risk of a portfolio lead to lesser margin requirements. The margin requirement may shoot up if you exit such positions without closing other open trades.
For example, if a client holds Nifty futures and Nifty puts, the margin drops to X. If you withdraw that money and the client has only X left, and you exit puts, the margin for Nifty futures now increases to Y. Leading to a short margin and a penalty for the broker if a peak margin snapshot is taken or end of day margin penalty for the customer if the customer doesn’t square off (it is either peak or EOD penalty and not both).
- SPAN margins increase
Exchanges publish margin files multiple times during the day; among them, the last final file is published at 5:30 PM, and accordingly, SPAN margins are updated at the End of the Day (EOD) file. If the EOD SPAN margin required value is greater than the available margin, it will result in a shortfall, and the penalty gets charged to the broker. This is explained in detail later.
- The other scenario of end-of-day margin increase is when a client is holding a calendar spread hedge contract where margin benefit is available; in such cases, on the expiry day, the current week’s contract expires, and as a result, the unhedged position results in margin increase and shortfall if no additional funds are maintained.
Any penalty due to the above scenarios isn’t passed on to the client from Aug 1st.
What is the time limit to add funds for upfront margin shortfall? And how will the client get to know about upfront shortfall?
The client has time till 11:59 pm on the T-day to add funds for the upfront margin shortfall. Clients can refer to the provisional margin shortfall email or voice message we send for peak margin shortfall. Until Aug 1st, the email and voice blast to customers would ask clients to transfer funds to avoid peak or upfront margin penalty. Since we are not passing this penalty to clients, we have stopped saying it, and we will make it more about increased margins or squaring off of positions (explained more below).
What are examples of the non-upfront penalty, which can be passed on to the customer?
If a client has a shortfall due to the reasons below and doesn’t bring in the funds by the next business day, a non-upfront penalty gets charged and is posted on the client ledger. SEBI allows us to pass on this penalty.
- MTM or marked-to-market losses in futures trade are charged on the same day and will be part of EOD margin requirements.
- Ad-hoc margins can be applied by the exchanges for high-risk category scrips due to increased volatility in addition to SPAN+ Exposure or VAR + ELM. Exchanges share the increased Adhoc margins in the margin file at the end of the day and will be charged as EOD margin requirements.
- Physical delivery margin (in case of FNO) -
- For futures and short positions, margin requirements go up on the expiry day to 40% of contract value or SPAN and Exposure (whichever is higher)
- For long positions, margin requirements start on E-4 days for ITM options,
E-4 Day (Friday) 10% of VaR + ELM +Adhoc margins E-3 Day (Monday) 25% of VaR + ELM +Adhoc margins E-2 Day (Tuesday) 45% of VaR + ELM +Adhoc margins E-1 Day (Wednesday) 50% of the contract value Expiry Day (Thursday) 50% of the contract value
Note - If OTM options become ITM on any day, margins are applied per the table above.
If you see any penalty on the client’s ledger after 1st Aug, it’s for these non-upfront margin shortfalls.
What is the time limit to add funds for non-upfront margin shortfall? And how will the client get to know about non-upfront shortfall?
The client has until T+1 to add funds for the non-upfront margin shortfall. Clients can refer to the margin statement to know the non-upfront margin shortfall. Non-upfront Shortfall = (CCO/Adhoc/Delivery margin required - CCO/Adhoc/delivery margin collected).
The issue with active traders is that they care about how much margin is blocked compared to the competition. Today since all brokers are forced to increase, this is okay. By the way, asking for an extra margin only solves small issues. The big ones for us are due to hedge break cases and options margin going up when the market moves against the trader.
As a programmer, I don’t understand, why you are saying, “this feature can take a year or even more to be implemented”. This seems like a simple feature. Normally, It should not take a developer more than 1 week to code this, and let’s say 3 weeks max for testing it properly. All orders are placed via the broker’s API first. A broker can check for each order one by one, If it breaks the margin or not and accept/reject accordingly.
I don’t know the technicals of how a stock broker’s tech work specifically. You must know better, I guess. Maybe, I misunderstood, what you are trying to say.
It isn’t a simple feature, especially since it has to happen in the order path in milliseconds and millions of times daily. Any slowing down can have a snowball effect on the entire broker order management system as the OMS connects to exchanges through leased lines which has a certain message per second capacity. So every order slowing down, even in milliseconds, can potentially choke the entire system.
Why is it complex?
Today when an order is placed in FO before it is fired to the exchange, the RMS checks if the margin required is present in the account. Margins in FO are on a portfolio of positions, not just that order being placed. So you have to run the entire portfolio through the very complex SPAN margin calculation along with new orders being placed and then check what the margin for this order would be and see if there are sufficient funds.
Today this check happens only during entry of new positions and not when exiting. To make this fix, when exiting, you have to simulate a portfolio post exit of position, see the margin required for that, and allow exit only if sufficient free funds are available in the account to meet any margin increase.
While the program itself isn’t complex enough to take one year or more, the biggest issue, as I said, is that it needs to happen in milliseconds and across millions of orders. Also, these things usually have infinite edge cases, so the testing itself can potentially take many months. And finally, upgrading the RMS of a broker is a high-risk activity. We take 3 to 4 months to upgrade our RMS versions even when the changes aren’t too large. There is no quick way to revert it if you upgrade and something goes off.
A trading platform’s backend is much more complex than banking or any other financial services platform. This is due to dependencies on clearing corps, exchanges, depositories, and leased lines in the order path. Also because trading platforms can’t afford to be slow or be down even for a few seconds during market hours.
Thanks for explaining in such detail. I admire your transparency so much. Really helps in building trust. Thats one of the main reason why I & probably others would like to be customers of Zerodha for as long as possible.
What am saying is it should have been done earlier only when client had to bear it. And if it wasn’t done then, why do it now? Then it was passed on to the client. So it wasn’t done. Now that brokers have to bear it how is it fair if margin is increased?
Then may be I am not one of them. Just for this I wouldn’t have changed my broker. That too when I know the intention of the broker is to protect me from penalty. I believe the ones who understand the intention wouldn’t leave. Tell me how many of them chose a different broker because you do not allow to trade in penny stocks. Or no market order for stock options. I have still stayed with Zerodha even after I am not getting instant unpledge. But may be you have data to support your claim. I do not.
Technology can help you here. Just like we can’t sell options if we don’t have enough margin, you can code it in a way that a client can’t close the positions if that leads to negative balance post closure. Am sure your IT team can do this.
About Volatility. Well again if the change in VIX can automatically increase margin required this problem also is solved.
What am saying is instead of keeping extra 3 percent, if vix increases by more than 3 percent intra day you should keep 6 to 8 percent extra margin from clients.
Am sure you have thought of some alternatives. I can think of solution but implementation of the same might be difficult.
The only fair system in the world is where you directly have “skin in the game” ~ Nicholas Taleb.
- When you had to pay the penalty, you were having “skin in the game” and hence you must make adjustments to ensure you have extra free cash that can minimise your peak margin penalty.
- Now when broker has to pay the penalty, they have “skin in the game” and hence they are making adjustments by going for 3-4% extra margin that can minimise their peak margin penalty.
It only seems fair … isn’t it? You make it sound as if there is some conspiracy. But we are all responsible for the money we have and under basic “free will premise” won’t like anyone else to take decisions on our behalf. And the entity who pays the penalty directly has “skin in the game” and hence should make the decision on margins / maintaining additional cash.
I think in all fairness, the margin penalty should be passed to clients so all clients can manage themselves but since EXCH got too many complaints from clients, so they now dumped it on to the broker.
This in turn forces the Broker to increase margins above the stipulated ones.
Now everyone should complain to EXCH about unfair increased margins
There should be a better way to track margin shortfall intraday, this needs to be worked on.
Earlier we didn’t even have margin in order window, but they came up with a nice prompt. Nudge also tells about potential margin shortfall.
I don’t understand the need of having multiple margin files in a day. All will get sorted if we get single eod margin.We now don’t have any extra leverage intraday
Thanks nithin sir for explaining this in depth, this will surely be of help to many with a similar query.
Not at all. All that I was saying is this should have been done much earlier. I am really okay with extra margin. In fact if your check the post that I have tagged earlier I was only asking for margin to be increased from the brokers end.
The root issue is not just to pass on the penalty to the end customer. The rules of the penalty are not set or disclosed correctly.
If you check the trading forums you can see all the broker commenting that if you exit a hedge trade first and short trade later - you will attract penalty margin
I paid peak margin penalty 6 times last year, got refund for 5 of them after raising SCORES complaint. In 5 of those cases i had not taken an additional trade in the entire day & still got the penalty ! In the other 1 case, it was my fault and i did not opt to claim a refund.
So if the rules are standardized and published - all the customers will be ready to adhere
PS: the margin requirement for each broker is absurdly different. I use 3 brokers and for the same iron condor each of them charges + or - 8000 Rs
What’s the order here? Like generally, which broker blocks more margin & which less?
Traditional brokers will have lower margin requirement for iron condor, iron fly compared to discount brokers.
In my case, kotak has a margin requirement of Rs53141 vs 56793 zerodha for a short iron fly - weekly bank nifty 1 lot a difference of 6.8%
would never advice to move out of zerodha if you are a options seller with pledging. Most of the other brokers dont provide good haircut %, for eg: i had to wait for 2+ months to get the SILVERBEES pledgeable in kotak and that too their haircut was 20%
zerodha is still the industry best for pledging (not unpledging) & number of securities in the collateral list
Yes Zerodha always charge 5% margin higher. Even wrong penalties are levied
This happens with traders many time. But in Zerodha i have face a problem regarding this. Suppose i have a short position in Nifty call and i have hedge that position by buying a call option and for margin benefit also. So for a Naked sell order Zerodha allows to buy any far OTM call or put. ( For margin trader don’t want to spend much on paying the premium).
And suppose my buy position call expiry is near so i want to switch to next expiry. In that situation if I squareoff the Buy position then my margin requirement is increasing drastically. So what I can do I buy next expiry call option then exit the existing buy position.
But here I face the problem while purchasing the next expiry OTM call. As I don’t have Naked sell Order so Zerodha doesn’t allow me to buy far OTM call . So I have to buy the OTM upto which Zerodha allows by paying more premium. So for those wo are buying Option for hedhe margin benefit this is a Major problem.
So please allow to buy far OTM option Buy.
Other brokers are allowing it Why Zerodha is restarting traders to buy Far OTM option?
Is there any Risk associated with this.
@nithin Kindly reply this. And if possible allow us to buy far OTM option.