I have two doubts with the RMS, If I have just enough balance required to have my position (Say I am short on an index or stock option). All of a sudden something drastic happens (so called black swan). I am not able to square off because there is a problem with the broker’s OMS. In such a situation the position has potential to lose very huge money than the margin required to take the position. Normally the RMS of the broker should square off my position. But what happens if the broker’s RMS also fails? Or in case of intraday the system does not allow the client to place order after the cut-off time. Who will be responsible for the loss? And what happens if the loss is greater than the margin blocked?
This is something every trader has to factor in - technology risk. Every product which is enabled by technology (almost everything) has a risk of going down - from AWS to Google, NSE to NYSE, and every brokerage firm in the world. If your position is open and you make losses, it will be debited on your account. If loss is greater than margin blocked, it extends to your free balance as well.
As a trader who uses leverage, I think the best way to cover for this risk is by not putting more than 2 to 5% of your capital on a single trade. This way a black swan event, be it in terms of tech platform going down or markets suddenly moving doesn’t affect you significantly.
what if client didn’t pay negative balance for several years ? interest goes up and then what ?
A brokerage firm can take all legal routes to recover the money.
I understand that technology carries a risk and none can do something about it. But don’t you think it is unfair to pass on the entire loss to the customer and the broker can walk free of liability though prima facie the broker’s role is higher than the client in the case I posted? I think the safest way is to invest in stocks or go for trading only where the bracket order feature is available.
I might not have understood your reply correctly but I am not talking about leverage. I cannot trade index derivatives and the only option available to the client is to pay the margin required to take a carry forward or even intraday position. The only safety valve I think is the circuit breaker and thus the loss cannot be really unlimited though it will be too huge.
This is something very important. Imagine that you are a trader in Kashmir (or any other place for that matter) and suddenly Internet and phone services are snapped. You will make huge losses. It’s important not to put much of your capital on the table at any particular point of time.
The broker has nothing to do in these cases and is covered by the obvious force majeure clause. The point I was trying to know and even highlight is how the broker can absolve all his liability and only the client has to bear that when the problem arose in the interface provided by the broker.
What is the maximum debit by any client u faced ? have u got it back
We have had many small debits, nothing large by one client. Hopefully stays this way.
wow , what was the reason for that loss ? no stop loss ? platform not working ? what happened ?
@nithin A doubt which has been nagging me for quite sometime is that something which is being spread around by an experienced trader . Even in case of a spread position taken, in case of black swan events, is there a possiblility that the RMS team simply squares off the sold position and leave the bought position alone? Because… this would lead to unfavourable exits and potentially huge losses for the client. Thanks!!
Say you are short 12000 puts and long 11800 puts. This has a max loss. But assume Nifty just fell 1000 points, short puts will have say MTM loss of Rs 75,000 which gets debited from your trading account from the margin you have. The profits from long options don’t get credited unless you sell them. So technically while your net position is neutral, your loss from short options will eat into your capital. So you are required to bring in more additional margins to continue holding the position or else there will be a short margin penalty from the exchanges.
At Zerodha, we typically wouldn’t square off in such a situation immediately. But we will send a warning asking you to add capital or square off.
Thanks a lot for the reply @nithin
However, consider the same in reverse as a debit spread. Im long 12000 Put and short 11800 Put. The max loss is anyways defined as the premium paid. Assuming a 1000 point fall in Nifty, the loss in the 11800 Put will be pretty huge again though the net position will be in a profit. Will the margin requirement kick in even in this scenario?
Also, what would be the margin requirements? The debit spread as such would require a margin of say 25k. How much more would I be needing to bring in… Thanks!!
Any MTM loss from a short option or future position has to be brought in. Your profits from long options doesn’t cover for it. Btw, you can use the basket function to see the margins
I think options don’t have mtm so that 75k would not be devited from the ledger, although margin may increase but i think with new margin rules it won’t be much.
This is what I have observed
Thanks for the reply @nithin Never really realised the deeper mechanics of how this would work. Honestly, its scary considering the fact that long option wont really be hedging in case of a black swan event as liquidity would highly dry up too. Tried the basket function as soon as it was introduced. Quite an nice one. Thanks
Wil you share your profit w broker on acc of smooth perf. Of d platform ? broker is nt god cannt b held respnsibl fr tech. issues (if nt hapned due to neglignce)
It will help for sure, enough liquidity will be there.