We’ve always said MTF is a double edged sword. The more leverage there is, the more risk clients and brokers end up carrying and, at scale, even the market itself.
Quoting @nithin 's tweet from today:
My biggest nightmare as a broker is what’s happening in the Korean markets right now. The source of my nightmare is the way our MTF book has been growing along with the industry as a whole. In terms of pure risk, MTF is by far the biggest risk we have taken since we started in 2010.
More specifically, the risk lies in our ₹9,000-crore book: at least half of it is in non-F&O stocks, which can hit lower circuits every day without offering an exit.
The problem with Korea is the one-way rally. When markets go up so sharply, leverage builds up because collateral values increase, leading to more borrowing and so on. The second layer of risk comes from the derivatives complex and leveraged ETFs, which further exacerbate moves on both the upside and downside.
When the markets fall, things get really ugly. The first leg of selling tends to be small, but as collateral and margin values drop, margin calls increase, leading to forced selling. Forced unwinding from leveraged ETFs makes this worse, and this downside move becomes a self-reinforcing loop until things stabilize.
Btw, MTF became popular only in the last 3–4 years, and we really haven’t seen a sharp market crash similar to the KOSPI since COVID. Even though MTF as a percentage of market cap is small, if the Indian markets were to fall sharply, it would cause severe sell-offs across many small- and mid-cap stocks. Brokers today typically provide MTF on ~1,500 stocks.
Luckily, thanks to SEBI, we’ve avoided the worst excesses that typically arise from unchecked leverage.
Btw, my colleague @Prayag maintains a site with really good market stats, including MTF, here: mtf.trading
