When a client sells options as positional - margin is blocked from trading account - but this margin blocked is kept by broker or by exchange?
Clearing corporation.
Does this give interest income to CCs.
It depends on how brokers have parked the margins at CC. Mostly all brokers park bank FD’s, so yeah there will be an interest income to brokers. If brokers park cash with the CC, then CC will make the interest income (which doesn’t happen).
Does it mean if I have 10 crores in my trading account and using it for FnO only (excluding option buying) broker would make 50-60 lakh per year in interests alone. Or I am missing something.
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Larger clients normally pledge securities to trade, don’t leave free cash. Also, the yield on the float income is much lesser as the money gets used for a bunch of things (including quarterly settlement when funds are sent out). But yes, float income is revenue for all financial services firms (including folks who run wallets - paytm, mobikwik, etc). It usually contributes 15% of revenue for brokers. FYI last year Interactive brokers made a billion dollars in revenue just from the float income in the US.
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Regarding customer’s unused cash margin, how does the broker earn interest on it? Do you keep buying some kind of rollling overnight fixed-deposits? This money doesn’t go to the CC right?
I always knew there is another source of income for brokers - otherwise some of them could not offer totally free brokerage or fixed monthly brokerage like 99 or 499 Rs. etc. …May I know how much Zerodha made last year from float income?
All money gets parked with CC as the client needs to trade using the funds, so yea it is placed as some type of bank FD. The FD needs to be broken every time client ends up taking a position in stocks, long options, or there are any MTM losses that need to be credited to the exchange. Most retail customers buy options vs shorting options or buy stocks for investments. So there isn’t any float income in this case. And like I said earlier, the larger customers usually pledge securities to trade futures or short options.
Yep, earning from float income is a portion of revenue for every financial services firm. Like I said earlier, around 15% of revenue.
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In US I guess brokers can also make float income utilising shares in clients demat. Do you think in future our SLB industry would pick up seeing our conservative environment and opportunities by it to both client and brokers.
Securities can be lent in the US without customers knowing about it, but regulations there require the broker to share this lending revenue with the customer. So the customer eventually figures out.
India has a very active futures market and hence SLB is most likely not going to take off. Futures are so much easier to use to short a stock than to borrow and sell. In the US SLB is primarily used to power shorting of stock. So no don’t see SLB taking off in India as long as you can use futures.
The other use case of SLB is when there is a reverse arbitrage (cash at discount to futures) opportunity, but that doesn’t come by too often.
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