What does Zerodha have to say about this arbitration order and article?

This article and and whatsapp messages about an arbitration order that went against Zerodha is making rounds. Looks like there are vested interests trying to push this hard. What does Zerodha have to say about this? @nithin

There are two parts to this question, have answered the first part here.

Second bit about the article you have linked, I just answered sometime back.

There is no way a broker can offer F&O trading to clients if he can’t square off client positions when he is making losses. Stock very easily could have done a PCJeweller and fallen a lot more and caused losses beyond what client holds as funds. If a broker doesn’t square off, a single/group of clients can cause systemic risk to the broker and the entire system. Anyone who has experience with how F&O works will know that.

NSE IGRP was in our favor. Client went for arbitration and this is headed by judges (1 in our favor and 2 against). If a person hasn’t traded F&O or tracked it closely, very tough to explain/convince how risk management works for F&O. We will appeal this again in court . This is how F&O trading works, not just in India - but across the world. If client doesn’t have sufficient margins to hold the positions, he has to square off positions or else brokers have to for risk management. If brokers can’t square off, a single client can cause risk to other clients as well. Also exchanges block brokers terminal and no client can take new positions if margin utilization for a day goes above 95% (which can easily happen if clients made losses and broker was forced to hold).

This article talks about us encouraging rampant speculation. Anyone who is our client will know that we don’t. We have not once ever advised/pushed any client to trade derivatives, intraday, or as a matter of fact any kind of trade/investment with us. We are just an execution platform. We have through Varsity, tradingqna and every other initiative always tried to explain the risks involved in derivatives/leverage and how most people don’t win.

If clients should be allowed to trade derivatives based on their income, hmm… this is a debatable topic. There is no law that currently requires us to do that. I believe that we should treat all adults as adults and let them be responsible for their decisions. Such restrictions is not good for the economy in general. Tomorrow there could be restrictions on how much gold, bonds, equity/stocks, real estate, MF, I can buy based on my income, because technically all these asset classes can lose significantly as well. Maybe there could be restriction on the kind of clothes, car, TV, or spend money in general (all depreciating products). This will be a wrong precedent.

Hopefully this makes sense.

Edit: 17th Dec 2018. SEBI has fixed the anomaly that existed by putting it as a rule that if there are MTM losses it has to be collected by the broker the same day. This arbitration had gone against us because the older regulation by SEBI allowed brokers with an option to collect losses on the next day. Check this circular


@Tarzan I don’t want cross posting but topic already opened here

This makes sense to me and I believe if client lost more money than he hold, I believe broker has to make good for the loss from his own pocket? Also it was mentioned in the article, Tatamotors recovered after closing the position, what is if it has fallen more? how can the broker or for that matter any one will know that upfront??

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I think Zerodha makes it quite clear what their policy regarding margin shortfall and square off is. Starting from the application forms to their blog posts.

Quite reckless and foolhardy indeed.

In my opinion, this is a terrible judgement. It sets a bad precedent. Based on this order, traders with low income or no-income (as per their income tax returns) may now be tempted to borrow money and take a sizeable position in derivatives, ahead of results announcement or other significant corporate actions, in the hope that if they make a profit they get to keep the money and if they make a loss, they could raise a complaint against the broker and hope to get their losses reimbursed.

Seen this today.