The Crude episode & the risk of running a brokerage business

[anshabhi]

Zerodha is not into prop trading.

[nithin]

@ayekee

Why doesn’t the exchange settle it amongst the longs and shorts at Rs 1, how can they allow negative pricing?

Why would someone who is short allow this? The product note very clearly says that it has to be as per Nymex closing price. People who are short would have gone to court and most likely have won the case if Exchange had allowed settlement at Rs 1.

[BOMBAY_STOCK]

What is networth for equity company i.e. Zerodha broking Limited???

Is our money safe in equity cash and equity index f&o ?

[nithin]

@Mach_oo7

These unfortunate clients must be holding pledged MFs or lIquid funds as collateral , hair cut must also be available with Zerodha in addition to the margin. This also should reduce the damage. I hope holding/ cash of other clients is not affected.

In MCX, we offered no pledging facility. So all our customers only held cash.
And of course like I have explained in the post, no one else is affected. The loss will be on our books and we have Rs 100 crores in this company.

[nithin]

@abbanerjee

@nithin: Okay got it. So if this is a zero sum game, its only brokers who have a huge imbalance on long are likely to be at risk - meaning on an average a broker is likely to have equal number of shorts and longs - but some might have more longs and some more shorts.

Meaning, Net Loss = SUM ( Per Broker Long for all clients - Same Broker Shorts for all clients)

In the case of Zerodha Commodities your 10 crore debit 300+ NET open long positions, is this the correct way to think about this ?

Also, do was the net long/short in Zerodha Commodities also including any prop trades ? Just curious …

Clients who are short, they will be paid in full and they get to withdraw full profits.
Clients who are long is for whom the broker will put up his own capital.

So irrespective of if you had customers who were short or not, the long customers have to pay up or broker has to cover.

Around 400 lots, but few clients had extra balance, so it isn’t 3lk x 400 math.

No prop trades.

[abbanerjee]

https://www.truebeacon.com/team

They do have a prop fund they manage. Not sure if they accept third party money.

[nithin]

@Prakhar_Agrawal

since now crude oil has become systemic risk to your business at Zerodha including whole commodity ecosystem are you considering to suspend trading by your clients for some time , I guess this would be prudent decision to make since risk reward is not favourable for it currently specially in your brokerage structure .
Moreover it might be beneficial to your clients as well since they only use crude to speculate ,not for hedging purposes.

We are increasing the margins and yeah slowly nudging people to move out of trading crude until all this settles down.

[abbanerjee]

Thanks, now I understand.

[nithin]

@BOMBAY_STOCK

What is networth for equity company i.e. Zerodha broking Limited???

Is our money safe in equity cash and equity index f&o ?

Closer to Rs 600 crores is what we have in the equity business. We are among the most well capitalized broking business in India. We had recently shared this on email

How safe is Zerodha?

I have answered this many times, but it keeps coming up. With a general concern on the health of financial services firms after the recent stock market meltdown, I thought maybe it prudent to update you on why you should not be concerned about your relationship with us.

1. We are a zero-debt financial services company. There is no borrowing of any kind.
2. There is no credit risk, less than 5% of our own capital is lent to customers in any form.
3. Our own funds in the business are greater than 25% of all client funds put together.
4. Our ratio of ‘complaints to active clients’ is among the least on the exchange.
5. We are profitable as a business and have enough reserves to sustain, even if there was an extended downturn in the economy.
6. We haven’t spent any money on marketing and advertising. The month of March was our largest till date in terms of new client account opening, thanks to our million-plus happy customers who help us spread the word.

[rahulsingh]

@nithin just wondering if the o.i. is much higher ,then what will happen if debits are somewhat close to net worth of your commodity segment broking arm?

[Shreyas_Kulkarni]

Nicely explained.

Looking at the volatility it seems that traders would be paying almost the entire futures price for a considerable time ahead.

Just curious…if india imports brent crude largely, why does mcx benchmark WTI?

[anshabhi]

Its probably not related to Zerodha i.e. no zerodha funds go there

[nithin]

@rahulsingh

just wondering if the o.i. is much higher ,then what will happen if debits are somewhat close to net worth of your commodity segment broking arm?

Yep, that is the risk of running this business, not us, but every brokerage firm. Imagine what happened to most of the insurance businesses when the 9/11 attack happened. That is one of the reason we don’t have debt and keep our running costs really low. Just to be sure we earn enough and have a war chest when these types of episode happens.

[nithin]

@Shreyas_Kulkarni

Nicely explained.

Looking at the volatility it seems that traders would be paying almost the entire futures price for a considerable time ahead.

Just curious…if india imports brent crude largely, why does mcx benchmark WTI?

This is the more popular of the two contracts and hence much greater trading interest.

[shankesh_shah]

@nithin Crude May Futures is also a falling knife. are you guys still allowing trading in MCX Crude Oil futures and what are your margin requirements? It is self evident that 100% margin is no longer sufficient noow.

[nithin]

@shankesh_shah

Crude May Futures is also a falling knife. are you guys still allowing trading in MCX Crude Oil futures and what are your margin requirements? It is self evident that 100% margin is no longer sufficient noow.

The good news is that MCX timings are back to normal from April 23rd. As long as the markets are open, we can have these things covered for.

MCX - Revision in Trading Timings

[rahulsingh]

@nithin is there any way to access info about other brokers who are in loss because of this?

[Kaval_Hora]

just one question. since the MCX closed at 5pm yesterday. though i know that expiry of crude was linked to nymex crude. dont you think that price at 5pm IST should have been the ideal price for settlement?

it was exchange problem that they did not provide the opportunity for trades to trade after 5pm why should tradets suffer?

[srikoptom]

Will it happen in equity future as well like closing in negatige price???

[_Anand_Thakkar]

@nithin whether shorter will withdraw profit?bcz matter went to court…i had loss of 4 lac due to this…but if sebi or court interven thn will u able to escrow profit from shorter?