Why there is a big difference in leverage MIS positions of stocks on traded on NSE? Some brokers give as high as 20x whereas others give just 1x.
I understand the risks involved. I have seen some brokers apply a cap on portfolio loss, beyond which portfolio is auto squared off.
I also understand that low liquidity or very high volatility can lead to 1x leverage. But this is not the case for majority of the stocks.
To make money in intraday, you need a bit of a volatility which is mostly found on midcap/smallcap stocks. So I am not asking about stocks in A segment.
If there is no leverage, the intraday trader is literally helpless.
I have seen a reply on similar query that some brokers charge a flat fee, so they don't make any money by giving additional leverage. I kind of disagree with that, because...
They might charge a % as a brokerage with a cap of max brokerage per trade (flat fee). So they will get maximum fee if they provide high leverage.
Leverage of 1x massively limits the traders ability to trade in multiple stocks. A 20x leverage means that (with 1/- cash in his a/c a trader can place 20 orders each of 1/- (notional/market value) in 20 different stocks). So he is very likely to generate more trades; which means more brokerage for the broker.
So can someone please explain some valid reasons for giving just 1x leverage on most midcap/smallcap stocks???
Small caps and sometimes midcaps lacks liquidity and often hit circuits.
Generally short selling of equity to carry forward is not allowed by any broker under general conditions. If broker provides 20x leverage on small cap and any trader short it with high volume and later if it hit the circuit it will be a tedious task for the broker and trader to settle it and end up paying huge penalty.
If the client does not have money in his account then broker has to pay it from his own pocket. So broker wont risk to loose his money to provide leverage and earn brokerage on it. The risk to reward is not justified to broker in this case.
If broker has to offer this facility he has to take market risk, operational risk, settlement risk, and liquidity risk which all can be avoided by simply not offering this facility and that is the reason for any rational broker for not providing mad leverages on illiquid scripts. Hope you got it.
Shorts that were not able to square off - Agreed on the risks involved here,
Penalty on uncovered shorts - My knowledge is limited here, but I think whether to apply the penalty to the client is broker’s decision. There are brokers who do not apply any penalty, the shares are bought in auction. I am not aware of any penalty to the broker by the exchanges.
I have already mentioned about liquidity in the question itself. There are many scrips which are liquid.
So rather than being defensive, it would have been good if brokers use more sophisticated risk management:
Put a minimum cash limit on a/c (Say, 5 lacs)
Put a limit on exposure per scrip (Say, 50k per scrip)
Do not allow trading in illiquid scrips
Do not allow trading in scrips where volatility is very high.
Auto-square off portfolio if total losses go beyond (Say, 50k).
You can even auto-square off short positions which go close to circuit limits.
Do not allow trading in scrips with circuit limit of 5%
Of course there are risks, but risks can be mitigated with proper risk management, I also understand finally its the brokers decision; so there is no point arguing about it.
I raised this point because I opened an account for trading intraday in small/mid caps and now I am realizing that it is just not possible. So I now have use a different strategy in my account and have to look for another broker who does offer what I am looking for.
I believe no broker will be able to give that facility.The points you mentioned sounds good but no way close to of any practical use. Let me explain.
You mentioned not to allow trading in illiquid scripts and high volatile scripts
The main problem is till a scrip become volatile it is non volatile, one can not predict when a stock will be volatile and illiquid and the chance for small stocks to behave weirdly are more. The same can happen to big stocks also but the chances are less.
To explain on point 6- what is close to circuit limit? what if price jumped suddenly? what if price went close to limit and broker squared off and then price reversed?
You are mentioning limits per scrip,minimum exposure etc and all are illusionary measures in controlling risk for providing mad leverages and exchanges wont accept these kind of activities.
To sustain in markets first one should understand the system and follow it instead countering it.
Thanks Siva,
I completely agree on all the points you have mentioned in the previous comment. And its not that I haven’t thought about it. I have experienced them myself. And I know the risk and rewards in these segments.
Small/mid cap offer pretty cool opportunities, so they are hard avoid. I did my research and yes I agree that most of the brokers are not willing to give leverage in this segment. So my search is still on, and I am sure I can convince someone with my risk prevention measures.
Once again thanks, appreciate your help.