Brokers encourage retail clients to bet more on markets by lowering trading costs

Stock brokers are encouraging retail clients to bet more on the markets by loweringtrading costs. Brokers are allowing clients to boost exposure to stocks and futures with the same upfront margins that they require them to pay up for initiating smaller bets.

The move is an attempt by brokers to stay afloat as uncertain markets have driven away clients, leading to a decline in trading activity and earnings.

But, the higher exposure comes with an express condition that these positions will be squared off on the same day.

“It’s also a question of our own survival,” said a stock broker, who did not wish to be identified. “By asking clients not to hold on to their positions overnight, we save them from undue risk, but giving them more leeway to trade intra-day helps us retain them and stay competitive in these tough times.”

This is how it works: A client wanting to trade, say, one lot of Nifty futures places a 10% margin, or 24,250 (assuming Nifty is around Monday’s close of 4850), with his broker, a leverage of 10 times. He normally settles the mark-to-market position – difference between the purchase price of one lot and Nifty’s daily closing price – on a daily basis.

Now, however, his broker allows him to take exposure to two lots of Nifty against the margin for one lot provided he closes out his positions by the day end. This increases a client’s leverage. Even in single stock futures, where a client puts up 13-15% margin, the leverage can be increased by allowing him to trade up to 4-5 lots against a margin for one lot.

Brokers said the condition of mandatorily squaring up the position on the same day lowers the risk of such trades. Brokers say this is a win-win situation for both as it allows a client to reap extra profits on low margin while helping brokers to earn higher brokerage by posting greater volumes.

Higher exposure during the day can still turn out to be risky if the market makes a big move on either the up- or downside as it can multiply the losses of clients who have limited loss-bearing capacity.

“We strongly advocate that clients should not do over-leverage as it could cause them losses beyond their capacity and force brokers to take client losses on their books if the market moves suddenly and sharply intra-day,” said Vinay Agrawal, ED-equities, Angel Broking.”

(curtsey: economic times)

Rupesh Yatesh Dalal
Head Research Department

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Apart from overnight risks, brokers cite a Sebi norm which took effect last September for an increase in intra-day leverage. The norm prescribes a penalty on brokers for any shortfall or non-collection of margin from clients. Earlier, a penalty was considered only at the aggregate level but the regulator has since made penalty incumbent on shortfall in a client’s account.


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