Intra-day trade may dry up as traders told to pay full margin upfront

MUMBAI: A popular product among day-traders that allowed them to take an intra-day bet on the Nifty or a stock by bringing in just a fraction of the value of the transaction upfront is set to come to an end.

Exchanges have asked stock brokers to mandatorily collect the entire initial margin before a trade from clients even for transactions that are not carried forward to the next day. This means broking firms will no longer be able to offer ‘intra-day trading’ products, a move aimed at reducing risks to the system. But the curbs could adversely impact trading volumes on stock exchanges and force several smaller brokerages to consider winding down their businesses, said industry officials.

Most brokerages offer intra-day trading plans to clients, who must square up such positions on the same day. Some firms allowed clients to trade up to 50-100 times the initial amount they brought in, provided they agreed to square up the positions before the close of trading. For instance, the value of one lot of Nifty futures is about Rs 9.21 lakh. The exchange-mandated initial margin to buy a Nifty futures lot is 11.5%, which is about Rs 1.05 lakh. Intra-day products by brokerages allowed traders to buy the contract for as low as Rs 20,000. The margin requirements are a bit different for stock trades, but the product allowed day traders to multiply their bets.

Intra-day trading volumes comprise at least 50% of most stock brokers’ daily activity, according to industry estimates. The total volumes that intra-day products contributed to the daily turnover for individual stocks could not be ascertained.

This arrangement essentially allows traders to take bigger positions than they could afford otherwise. Brokers consider them low-risk as intra-day trades were perceived to be less risky than those involving stock delivery. Also, such positions did not have to be reported to the exchanges since they are compulsorily squared off before trading hours. Brokers must pay a penalty only if the initial margins have not been paid for trades carried forward to the next day.

“The intra-day product picked up in a big way in the last five years or so because of the increase in online trades,” said the chief executive of a retail brokerage. “The extent of leverage provided was shocking at times, but it was no secret.”

Now, brokers must mandatorily collect initial margins for stocks and derivative trades from clients upfront, said the exchanges in separate circulars recently. Clients will also be allowed to trade on the basis of the value of the shares held in their demat account. One of the exchanges held a conference call with stock brokers on Thursday to provide more clarity on its implementation.

Brokerage officials said the decision to tighten the upfront margin requirements could have been pushed by the Securities and Exchange Board of India (Sebi), which has been concerned over the growing popularity of this product because of the potential threat of disproportionately high borrowed trading positions in the system. The worry was that an extraordinary sharp move in the market during the day could trap these intra-day traders, resulting in defaults even by brokers.

“Intra-day products just based on leverage will stop now,” said Nithin Kamath, founder and CEO of online broker Zerodha. “It’s going to hurt the revenue for the industry in the short term, but reduced risk is better for the ecosystem in the long run.”

Industry officials said many midand small-sized brokerages might find it unviable to continue after this move, which follows a series of recent steps, including restrictions on use of clients’ shares and funds. “This is almost like the final nail in the coffin for many brokers,” said the chief executive of a brokerage based in Mumbai.