Allow brokerage firms to offer additional leverage when trading intraday.

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Background

There are over 400 retail brokerage firm who have over 50000 employees on the roll. Apart from catering to investors, they also cater to lakhs of people who trade on the exchanges for a living. Most of these active traders engage in day trading using leverage (trade for more money than what is present with them) to earn. The brokerage revenue generated from this active trading community is a major portion of the overall revenue of the retail brokerage firms. 

Recently both the stock exchanges - NSE and BSE, put out a guideline which limits how much intraday leverage can be provided to the traders by the brokerage firms. This would most likely have been under the instruction of SEBI after recent frauds at two brokerage firms - Karvy and BMA. 

When a trader takes any position on the exchange, the exchange blocks the requisite minimum margin from the brokerage firm. So if the brokerage firm in turn allows the trader to take the position with lesser than the minimum margin, it is usually through their own funds. The exchanges now has put a clarification that brokers can't provide this additional leverage.

The industry has been working this way for decades, any sudden such action is going to have huge collateral damage. This will hurt the revenues of the entire brokerage industry, create job losses, hurt the traders who rely on this for a living, reduce the liquidity on our exchanges and STT losses for the government. 

What could possibly be done? 

SEBI has two concerns 

When the brokerage allows the trader to take the position with leverage, the funds aren’t the brokerage firms, but potentially of another customer. This is a valid concern, but with the new margin reporting structure, the rule can be set that broker can allow leverage with only own funds. This can be easily spotted by the inspecting teams and erring brokerage firms can be fined heavily. 

There are brokers who give excessive leverage (50 to 100 times) where the chances of the client losing money are significantly higher. Today the exchanges use a system called SPAN to figure the margin requirement for a trade. SPAN doesn’t distinguish positions based on if intraday or overnight, or if there is a stoploss order placed or not. By the position being intraday or with stoploss, the risk reduces and hence the margin requirement should ideally be lower, but SPAN doesn’t reduce the margin. This seems like an anomaly because SPAN margins do reduce when you take positions that hedge each other. 

So we could instead of asking for full margins for trades which are intraday and with stoploss, ask only a factor of it like how SPAN does it for positions that hedge each other. This will be fair for the trader and the regulators. While deciding the factor, it could be set to a maximum factor of the SPAN which regulator is comfortable with and ensure that brokers don’t misuse this facility. 

I trade for a living and my family depends on this. It is possible only because of the additional leverage my brokerage firm offers. Yes, we can compare ourselves to developed markets and say, we should follow what they do. But the point here is that we aren’t developed and most of us Indians don’t have enough money, so this type of leverage helps. 

I hope that other traders will support this petition and I hope that the regulators make changes and don’t kill an entire industry just because of a few brokerage firms who might have done a fraud.