First of all I’m new here in the forum so Hi to all. I have been wondering this for a while so I’m posting this. So here goes;
Let’s just look past the concept of 50x or 100x leverage, but if the brokers are not even allowed to provide 10x-20x leverage then doesn’t that mean that brokers simply become a middle man between buyers/sellers and exchanges, that is no longer needed for both derivatives and those trading equity without margin which together comprises most of volumes/trades generated?
By making traders place their order through brokers,
1- Any rebates offered by exchanges for generating volume goes to brokers instead of traders. (which will be maximum on Intraday/FnO right?)
2- Traders end up exposing their positions to brokers.
3- Our money remains in the hands of brokers, so there is that risk.
4- There is the extra risk of breakdown/glitches on server/software platform infrastructure on brokers side on top of the exchange. We have to hope the glitches and problems on their end doesn’t cost us the money. Not to mention they won’t cover it if anything happens.
5- And for all of this, We have to pay thousands of rupees every year as brokerage and the gst tax on the said brokerage.
Essentially then, this all made some sense where brokers provided access to their fund pool even if it was 10-20x leverage but without it, this all becomes a system where collectively people are forced to pay crores of rupees every year to a third party (i.e. brokers) while bearing unnecessarily extra risks.
If SEBI want’s to keep such an indirect system to trade through brokers rather than directly through exchange then, isn’t this what you would call a Scam?
@nithin If I am missing something here then shed some light because otherwise it seems with all the changes that have come the old system of transacting is no longer justified.
There was an article related to this on Z-Connect last year when there were rumors that the regulators/exchanges were looking into providing Direct market access to retail investors -
But who is going to build the trading platform, compliance, complaints, backoffice/reporting platforms, etc? Exchanges? Exchanges act as regulators too, you can’t regulate yourself. Also the technology to run exchanges are completely different as compared to what is required to run a broking business. It is almost as good as asking MRF tyres to start making cars since they make good tyres. Maybe they can, but it is a different business.
Btw, this doesn’t mean no leverage, there is no additional intraday leverage.
The day crude oil went negative last year, if there were no brokers, the commodity exchange would have gone bankrupt. This is without any additional intraday leverages.
I agree that brokers took a hit and saved the system as a whole but technically the clearing corporation would had gone broke instead of exchange or I am missing any technical point here.
Yeah, clearing corporations technically. Clearing corporations are those which hold all securities/funds of all brokers (and hence clients). So ringfencing this entity is super important. Every few years there will be one mega incident that could potentially bring the clearing corp down - Satyam, 2008 crisis, Crude oil last year, Market fall in March last year, etc.
What happened in the past when brokers lose their own money/idle client’s money when some traders use 20x leverage and lose everything due to drastic volatility?
Can the broker just close down the business and escape with all the funds in broker’s account?
Yeah, there have been many incidents where brokers have gone bankrupt when clients have lost significant amounts of money (more than the margin). Once bankrupt (losses eat into other clients capital with broker), then yeah clients money is at risk. Brokers haven’t really escaped and all.
The last big event when a lot of currency brokers went bust was in 2017
Can brokers also sell client’s securities in the demat account without client’s approval (but POA is given) to recover the lost money in case of going bust due to above mentioned reasons (not because that particular client’s fault but because of the the other systematic risks)?
@nithin do you think that from 1 SEP onwards there will be gradual increase in option buyers in index and stock as intraday leverage will be at minimum.
Technically possible, but SEBI has been putting checks and balances in place to not let it happen. Important to keep a track is there are any debits in your demat account (Depositories notify via email/sms)
Online brokers like us have already transitioned away from POA accounts.
I think the transition will be from futures to options, and this has already been happening for the last many years. Folks who trade stocks will just trade lower quantities I think.
Yes, you are right. Brokers won’t really have much value addition after the leverage is taken away from 1sep; thereby perhaps paving the way for direct trading at exchanges in the future. You can never know.
Just like in the US, some companies started listing their IPOs directly on the exchanges, thus cutting off the investment bankers completely. Who would have thought some years back then that this too could be possible.
Similarly, some day, brokers may also get bypassed if they don’t have much value to add in the future. No one is indispensable.
@nithin
In reference to this news now that CPAI, ANMI have both approached SEBI is there any hope of the peak margin rule being reverted ? Is there a scheduled meeting between SEBI and these bodies regarding this coming up ?
@nithin i have a different question
How you remain so simple same Nithin coming here and answering our forum even after a 100 crore package and limelight?
Is there any difference if you use intraday volatility to calculate VAR or SPAN?
Is there any possibility that the intraday VAR and SPAN could be calculated intraday volatility and risk rather than overnight volatility and risk?
About answering on the forum, I love reading all the interactions here. Helps me significantly as CEO of Zerodha as well. I guess I got super lucky of being able to build a career around my core competency and something that I love.
